Banks step back from buy-to-let after Brexit
Regulator tells Treasury select committee that lending is expected to 'cool significantly' on coming months
Banks and building societies are expected to curb buy-to-let lending in the aftermath of the vote for Brexit, according to one of the UK's most senior regulators.
Richard Sharp, an external member of the Bank of England's financial policy committee, told MPs on the Treasury select committee yesterday that buy-to-let lending would probably "cool significantly" in the coming months, reports the Daily Telegraph.
"I suspect the banks will want to see what regime we're in in terms of house prices before they go back to aggressive lending," he said.
Bank of England governor Mark Carney warned during his evidence to the committee, which is investigating the fallout from the EU referendum, that even though central bank action could prevent a credit crunch, it was not a "silver bullet" and that demand for loans depended on the economy.
The comments are the latest to predict banks will take a more circumspect view of buy-to-let in the months and years ahead, primarily due to changes to the way landlords are taxed.
Under new recommendations from the financial policy committee, prospective landlords will need to ensure their rental income offers greater cover on their borrowing. Barclays, TSB and Nationwide have already implemented a proposal for rental income to provide 145 per cent mortgage cover.
To get the loan down to a sufficient level based on current rents, crowd-funding website Property Partner says minimum buy-to-let deposits could rise to 60 per cent in some areas, the Telegraph reports.
Buy-to-let borrowing has fallen sharply following the increase in stamp duty on second homes from April.
Council for Mortgage Lenders figures show buy-to-let issuance in May was around half of what it was in the same month last year, says FTAdviser, remaining around 85 per cent down on the bumper sums borrowed in March to beat the stamp-duty hike.
Buy-to-let in spectacular rise and fall either side of stamp duty hike
Buy-to-let investment rose dramatically in the first three months of this year as prospective landlords rushed to beat a stamp duty hike – and then fell away just as spectacularly afterwards.
According to Bank of England statistics published yesterday, buy-to-let purchases accounted for £13.5bn of loans between January and March, accounting for 21 per cent of the market overall and up more than 75 per cent on the same period in 2015, the Daily Telegraph notes.
As a result, landlords outstripped the borrowing of first-time buyers for the first time since early 2008, at the height of the "credit crunch". The period saw new purchasers take out £10.8bn worth of mortgages, up 25 per cent year-on-year.
However, lending to landlords seemingly collapsed in April, say figures from the Council for Mortgage Lenders (CML).
The Belfast Telegraph reports that 4,200 loans with a combined value of £600m were handed out in April to those purchasing buy-to-let properties, down more than 85 per cent on March and around half of the levels seen in April 2015.
CML director general Paul Smee said: "There is a sense of calm after the storm... We expect the market to take several months to return to its previous levels after the lending surge."
Sitting in the middle of these wildly divergent trends was the introduction of a stamp duty surcharge of three per cent on second homes, which came into force on 1 April and hikes the upfront levy due on a £250,000 house from £2,500 to £10,000.
With a further clampdown on the relief landlords can claim on mortgage interest and maintenance costs coming from next year, is this now the beginning of the end of buy-to-let?
Colin Bell, at Hampshire Trust Bank, does not think so. Rising house prices are holding back increasing numbers of first-time buyers, he told the Telegraph, so landlords will continue to borrow more. Meanwhile, younger households show an increasing cultural trend towards renting.
Others also believe the demand will remain high while low interest rates reduce the returns available from mainstream assets. In addition, it's thought the crackdown will simply lead to higher rental costs for already hard-pressed tenants.
Buy-to-let could become a 'wealthy person's game'
New guidelines for mortgage lending criteria before tougher tax rules come into force next year could make buy-to-let investing a "wealthy person's game" in the years to come, according to one expert.
Simon Collins of broker John Charcol was speaking to the Daily Telegraph in the wake of a decision by 'big four' bank Barclays to increase the "minimum rental cover" for landlord loans. Rent will now need to be 145 per cent of mortgage costs, compared to a previous 135 per cent.
The change could encourage prospective landlords to increase rental costs – a likely prospect given the tax rises coming in next year – but in practice will also make it harder for wannabe investors to secure a loan. Nationwide's specialist buy-to-let arm, the Mortgage Works, upped its own minimum rental cover from 125 to 145 per cent last week.
As of next year, tax changes will come into force that will reduce the tax relief on mortgage interest for private landlords. The effect will be both to double the annual tax bill for higher-rate taxpayers and to push more investment homeowners out of the basic rate bracket, leaving many nursing annual losses.
"In London and the south-east especially, a lot of people who weren't necessarily rich or wealthy were doing buy-to-let because they didn't understand pensions, and saw property as a safe, tangible asset, said Collins. "Let to buy – where homeowners rent out their main home to raise cash to move – was very, very popular, and the people doing it were not wealthy people."
Barclays says that as a "responsible lender" it must "ensure that aspiring landlords can continue to meet all their financial commitments and are protected".
Tougher lending criteria could also be introduced in a move to head off new rules on the sector from the Bank of England, which has launched a consultation on proposals designed to force banks to take into account a wider range of fees when assessing buy-to-let mortgage affordability.
Earlier this week the BoE released a research paper that claims the tax changes next year, coming after a tax duty surcharge this April, would not prevent continued demand for buy-to-let property as investors anticipate "positive expectations of rental growth in the years ahead".
Will buy-to-let tax changes push rents up more?
A major tax assault on the buy-to-let sector due to be ramped up next April could make it even harder for already squeezed tenants to get by financially, according to one housing academic.
Kath Scanlon of the London School of Economics told the Daily Telegraph it is "not clear what the government wants these policies to accomplish".
"They seem to reflect the public unpopularity of landlords, who are easy objects of blame for the current situation in the housing market, especially in London… Shrinking the sector does not seem sensible given what we know about unmet demand and need," said Scanlon, who has published a report on the issue along with colleagues Christine Whitehead and Peter Williams.
"It is said that tenants cannot pay more than they already are – yet a lot of sitting tenants have not had recent rent increases," she added. "That may change."
Scanlon argues that the real enemy of housing affordability is lack of adequate supply and that without a huge increase in building, buying a home will remain unaffordable and the number of people being forced to rent will rise. In this context, the squeeze on private landlords will only threaten supply further and almost certainly drive up already high rental costs.
So far, the government has introduced a three per cent stamp duty surcharge on new investment purchases and excluded landlords from a cut to capital gains taxes. From next year, cuts to mortgage interest relief will double the tax paid annually by landlords paying higher rate tax – but these cuts will also drag more landlords into upper tax brackets.
Such reforms will hit the yield on landlords' properties and, it is hoped, cool the rampant demand for buy-to-let investments. They could also result in many landlords selling their second homes, thereby increasing the supply of houses for sale. This should help to moderate house price growth, making it easier for renters to become first-time buyers instead.
But landlords will feel squeezed if they keep rents largely unchanged, rather than raising them to cover lost income. If market forces alone are not able to contain price rises, political intervention may be needed.
That is precisely what the new Mayor of London has pledged. Sadiq Khan wants to introduce a London living rent, which would require the support of the government and be set in each area at a third of local average earnings, with increases indexed to inflation.
The Financial Times reckons that at least larger developers will not be as opposed to such a scheme as might be assumed. There is evidence from similar schemes in Germany and New York that certainty over rent increases is useful to investors and encourages tenants to stay on for longer. This reduces other expenses such as the opportunity cost of a property standing empty.