Dramatic Changes for Buy-to-Let Loans System

Private Rental December 4th, 2015
Dramatic Changes for Buy-to-Let Loans System

Recent indications from major lenders demonstrate a retreat from the buy-to-let loans sector as banks now increase the required deposit to 50%.

Only recently, Barclays became the first bank to change its criteria for mortgage applications for buy-to-let loans. The previous required rental income had to be 125% of the monthly interest, but now has to be 135%.

If other banks follow suit, which many experts believe will be the case, then it could increase the squeeze on existing investors. BM Solutions, of Lloyds Banking, have already tightened criteria for buy-to-let loans with for borrowers with deposits under 35%. With additional costs for landlords in the way of a 3% rise in stamp duty and reduced capital available, then it will increasingly exclude smaller investors from increasing their property portfolio.

All the new changes to the buy-to-let loans system is bound to reduce the growth in the market. The new stamp duty rise will see the tax on a £400,000 property rise from £10,000 to £22,000. Moreover, the tax relief will drop from 45% and 40% to just 20%, so net profits will drop drastically. When letting fees and any additional small costs are included, profits will be minimal compared to previous years.

These changes represent the growing view in the market which evaluates of the current buy-to-let market as a threat to financial stability and the wider economy throughout the UK.  The Bank of England only recently published its report which identified a number of threats to the UK economy, which emphasised the excessive growth of the buy-to-let market.

Evidently, banks want to make sure that any landlords receiving buy-to-let loans will be able to continue paying interest to banks even if there are changes to their income, especially regarding potential interest rate hikes. According to the FPC, “buy-to-let borrowers may be more vulnerable to an unexpected rise in interest rates or a fall in income, which could exacerbate the scale of a fall in house prices.”

First-time buyers will be one group that are glad that buy-to-let investors will be less competitive

One group who will be glad these changes have occurred will be first-time buyers. Buy-to-let landlords have typically nudged them aside in the market by out-pricing them. Now they will be able to compete for properties, as the government  launches new policies to help them, such as the recent Help-to-buy ISAs. These are set up as tax-free savings vehicles, which also receive government bonus contributions of 25%, up to a maximum of £3,000.

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