We’ve warned against getting too enthusiastic about the buy-to-let business for some time. The political tide is turning against it – as is quite clearly shown by the stamp duty surcharge on second properties and the huge changes to the tax deductions allowed on mortgage interest and wear and tear.
But this week brought another clear signal that the authorities have buy-to-let in their sights. The Bank of England’s Prudential Regulation Authority has produced new rules on buy-to-let mortgage lending.
Lenders will now be required to make sure that borrowers will still be able to pay their mortgages if interest rates were to rise to 5.5% up to five years after they take it out. They will also be obliged to make sure that the income from a property will be 125% of the mortgage payments.
Some lenders will already have similar stress tests in place (it isn’t a surprise – the consultation began in March, and lots of lenders have already moved to 145% to take the falling value of buy-to-let tax breaks into account). But many won’t.
The result will be fewer buyers in the market (particularly in the Southeast where yields are super low) and – in time – a fall in house prices.
That’s bad news for current buy-to-let investors hoping to get out with significant capital gains, but good news for first-time buyers looking to get into the property market in a year or two.
It’s also something that might to begin to redress the wealth imbalance I mentioned in an earlier post.