Tuesday, October 7, 2014
Bank of England’s extra powers could mean new buy-to-let landlords have to put down a 40% deposit to get a mortgage
The Bank of England request for extra powers
The Bank of England’s request for extra powers, in order to direct lenders as to how much buy-to-let investors are able to borrow, could mean that landlords in the South East and London will have to find a 40% deposit in order to secure mortgage finance, according to analysis by Countrywide Residential Lettings, the UK’s largest lettings agent.
If granted, the powers will allow the Financial Policy Committee to ask lenders to stress test how much new landlords can borrow and ensure that the income landlords receive is greater than the interest payments on their mortgages.
Lending on investment property is typically secured against the rental income a landlord can generate. For most lenders, landlords are assessed on whether the rent generated from the investment property will cover 125% of the interest component of the mortgage. This gives both the lender a degree of security against interest rate rises and takes into account the money a landlord will reinvest back into the property for general maintenance and improvements.
At present, the interest rate against which the borrower’s ability to meet repayments is at the discretion of the lender. Over the past two years, this rate has typically been around 5%, translating into 1.2% above the 3.8% rate at which the average landlord secures their loan. For the average landlord who has purchased during 2014, the rental income from the property covered 205% of the mortgage interest, well inside the 125% limit. Tested against an interest rate of 5%, generally the rate which lenders currently use to test affordability means the rent will cover 165% of the mortgage interest.
The implementation of the findings from the Mortgage Market Review (MMR) has seen the ability of new owner occupiers to meet higher repayments tested at interest rates of up to 7%. While powers have yet to be formally granted, the implementation of stress testing alongside a potential rise in interest rates, would see new landlords have to put in larger amounts of equity to obtain mortgage finance. Stress tested against an interest rate of 7%, in similar fashion to owner occupiers under MMR, a third of new mortgaged investors would have to increase the amount of equity they put down, amounting to an additional £40,000 on average.
Commenting on the Bank of England’s proposals, Nick Dunning, Group Commercial Director, Countrywide plc, said:
“Stress testing of new loans for investors has the potential to increase the entry barriers for would-be landlords. It will primarily affect areas in the South of the country and areas where yields are lower. If the proposals are implemented, would-be landlords will have to put down increasingly larger deposits to meet more stringent lending criteria. The high value nature of parts of London and the South East mean many landlords will find themselves having to put down deposits upwards of 40%. While lenders need to ensure repayments are affordable to the borrower, they must ensure they strike a balance between affordability and viability.”
Launch of the Rent to Buy scheme
The Private Rented Sector (PRS) was also a key topic at the Conservative Party Conference with the Government announcing the launch of the Rent to Buy scheme.
The Private Rented Sector continues to play an important role in housing the nation, with the sector having doubled since 2007 and now consisting of 4 million PRS households in the UK. However, the number of rental properties has not kept up with the growing demand for rental accommodation and so there is a chronic shortage of affordable rental homes across the UK, particularly in London and the South East. This, in some part, is driving up rents.
The Government’s Rent to Buy scheme is intended to encourage the building of up to 10,000 new homes by housing associations and other social housing providers, enabling landlords to let them to tenants at 80% of market value for a minimum of seven years, during which time the tenant can save up for a deposit to buy their own home, if they wish.
Commenting on the Rent to Buy scheme, Nick Dunning, said:
“We welcome the launch of any scheme that seeks to assist in the building of more new homes in the UK. However, the Government’s plans to build 10,000 properties as part of the Rent to Buy scheme, will only scratch the surface of the thousands of rental properties that are needed to meet growing demand from those entering or moving within the Private Rented Sector.”
Variations in rents and arrears in the UK
Rent has continued to increase steadily throughout the year with the average rent in Q3 2014 now at £903pcm, an increase of £21pcm on £882pcm in Q2 2014. In September, average UK rent increased to its highest level for 32 months to £916pcm, a growth of 5.2% year-on-year. All regions saw a year-on-year increase in rents apart from the Midlands, which saw no increase in Q3 2014. Greater London saw the greatest increase, up 9.8% on Q3 2013, followed by the East of England which saw an increase of 7.3%. Arrears have remained relatively stable with many regions seeing a decrease and some seeing less than a 1% increase.
Table A: Regional variations in rents, yields and arrears data in England, Scotland and Wales
In terms of the size of properties, all properties saw an increase in rent quarter-on-quarter and year-on-year. Four-bedroom plus properties saw the greatest increase in rent year-on-year with an increase of 5.8% to £1,524pcm, followed by three-bedroom properties at 4.8% to £956pcm. Two-bedroom properties saw the smallest growth in rent, up 4.1% to £822pcm.
Table B: Variations in rents, yields and arrears data by size of property
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