Loan to income ratio on Buy to Let – what could be next?

by Neil Patterson

14:26 PM, 17th July 2014
About 4 years ago

Loan to income ratio on Buy to Let – what could be next?

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Loan to income ratio on Buy to Let – what could be next?

It has been announced that the Nat West and RBS group will be tightening their Buy to Let mortgage criteria even further. They will be limiting their loan to income ratio to 4.99.Buy to Let

The move became effective as from the 14th July and this criteria change follows on the heels of a recent reduction in the maximum number of BTL properties to 4 owned by the applicant.

Other High Street lenders have also tightened their BTL criteria in recent weeks including Woolwich with a change to calculating maximum mortgage size at a “nominal” rate of 5.79% rather than the product pay rate. In some circumstances, especially lower yielding properties, this new calculation can have the effect of reducing the maximum LTV of a BTL mortgage quite considerably.

Both lenders are citing “Affordability of the mortgage contract” as reasons for the change. This has echoes of the recent MMR (Mortgage Market Review) changes, which applies to the residential market. There could be similar tightening of criteria from other lenders too.

This has been followed by hints from the Council of Mortgage Lenders (CML) that Buy to Let may be looked at next by the Bank of England as part of the Financial Stability report.

This report resulted in Banks being capped to no more than 15% of their residential loans being over 4.5 times income multiples. Could some sort of cooling measure or cap be placed on Buy to Let next?

It is almost certain that the “Gaming” of BTL where purchasers try to avoid earned income multiples on residential properties by claiming they are for BTL will be clamped down on.

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Comments

Mark Alexander

14:55 PM, 17th July 2014
About 4 years ago

Hi Neil

If the BoE, the treasury, the CML and the FCA are all concerned about house price inflation and the rapid expansion of the PRS then this could indeed become a problem.

Some will argue that BTL produces homes but of course it doesn't, only new development achieves that. If development of new homes continues to fall below housing demand then BTL does nothing whatsoever to improve demand.

It is demand which affects prices and if left wing politics come into it, BTL speculators and entrepreneurs are unlikely ever to be favoured in political or economic decisions.

To those who are seeking to build portfolio's, the best time to do so is now because none of us know what the future holds. If BTL lending is capped by regulation then fewer people will be able to benefit from it.

Capping BTL lending may also stabilise property prices. If you are a first time buyer, a parent of a first time buyer, a tenant or a very wealthy landlord who doesn't need to borrow then you are likely to vote for capping. Whilst there are a lot of landlords the populist view, which the politicians and regulators will be well aware of, is unlikely to favour landlords.

The pwers that be need to consider this matter deeply though. If people can't afford to buy a home, they must rent. If BTL investors can't raise money to buy then who can? Yes this will de-stabilise property prices but this will not necessarily mean that more people will be able to buy. Also, property prices are a major stimulus to the economy because the 'feel good factor' is so closely allied to property prices. A sharp fall in property prices and a slight rise in interest rates would also undermine confidence and would probably result in a sharp rise in repossessions too.

My worry is that too many levers are being pulled at the same time in an attempt to steer our economy back on course. If this continues our economy may well continue to shrink in ever decreasing circles.

Bring back capitalism please - QUICKLY!
.

Neil Patterson

16:10 PM, 17th July 2014
About 4 years ago

Reply to the comment left by "Mark Alexander" at "17/07/2014 - 14:55":

I just have a gut feeling (and my gut is not normally wrong) that it makes logical sense based on the residential restrictions and the reasoning behind it to cap BTL indebtedness somehow.

I hope I am wrong this time, or it is a very minor tweak like max 80% LTV.

Mark Alexander

16:15 PM, 17th July 2014
About 4 years ago

Reply to the comment left by "Neil Patterson" at "17/07/2014 - 16:10":

Hi Neil

If I was consulted and asked to create a sensible cap it would be based on the following criteria:-

Gross rent on leaseholds reduced by 35% for stress testing purposes

Gross rent on freeholds reduced by 25% for stress testing purposes

Reduced rental income (as calculated above) to service at a stress test of say 7% across the whole portfolio.
.

Neil Patterson

16:45 PM, 17th July 2014
About 4 years ago

Reply to the comment left by "Mark Alexander" at "17/07/2014 - 16:15":

Hi Mark,

I don't think if anything was to be introduced that it would be that extreme or complicated.

Don't forget the residential cap had no effect on current lending, but only stopped the possibility of income multiples getting out of hand as a percentage of a lenders loan book.

It could be something simple that puts the lid on lenders stretching LTVs and stress testing.

Mark Alexander

17:27 PM, 17th July 2014
About 4 years ago

Reply to the comment left by "Neil Patterson" at "17/07/2014 - 16:45":

What I suggested is what I think all borrowers should use anyway. Anything else is too risky IMHO. Current BTL lending criteria is far too risky for borrowers who stretch the limits.
.

Mark Alexander

19:44 PM, 17th July 2014
About 4 years ago

PS - what would worry me even more is if BTL investors were saddled with some poorly though out scheme which based lending in earned income.
.

Neil Patterson

19:46 PM, 17th July 2014
About 4 years ago

Reply to the comment left by "Mark Alexander" at "17/07/2014 - 19:44":

Agreed, but the BofE seem very pragmatic recently and I doubt they would want to kill a whole market.

Jeremy Smith

23:50 PM, 17th July 2014
About 4 years ago

Reply to the comment left by "Mark Alexander" at "17/07/2014 - 19:44":

Can anyone else join in ??

- BTL borrowing based on earned income is a nonsense when a landlord has a portfolio of properties to look after, when is he/she supposed to have the time to carry on a full time job as well, (and fit in all those holidays he can now afford !!) ??

A long standing issue for me has come to mind ......

The reason I cannot pursue cheaper, better yielding properties in other parts of the country is because of the CGT I will have to pay before investing the remainder into another property(ies).
....IF I could shift my capital to other better yielding properties without losing the big chunk when I sell, before rebuying, then I would do so tomorrow.
....I am trapped with the properties I have owned for some years, and with ever increasing property prices, I effectively receive a lower and lower yield to value, and a higher and higher CGT bill if I sell up.

...What's the solution ??

If landlords could sell in higher priced areas without this penalty, this would free up alot more properties to come onto the market and give first time buyers the opportunity to buy one. There must be thousands of landlords sitting on properties because they can't sell them without losing a huge chunk of their investment.

Fred Bloggs

4:00 AM, 18th July 2014
About 4 years ago

Surely putting restrictions on BTL lending will just lead to rents increasing even further thus all is not lost !!


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