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Option Homes Ltd - News- How new Bank of England proposals could affect buy-to-let landlords

How new Bank of England proposals could affect buy-to-let landlords

Date Added 25/05/2016

New proposals announced recently by the Bank of England could potentially reduce lending to landlords by as much as 20%.

The Bank of England is suggesting that buy-to-let investors should only be able to borrow limited amounts and that lenders should be much stricter when deciding whether to grant mortgages to landlords. When deciding whether to approve a mortgage, lenders should take into account not only the rental income expected, but also the landlord`s wider financial situation including additional income, personal tax liabilities and any tax liability or costs linked with the property.

The aim of such measures, according to the Prudential Regulation Authority (PRA), an arm of the Bank of England, is to restrict what it calls `inappropriate lending`. In December, the Bank of England governor Mark Carney warned that action would be taken on the high levels of lending to landlords in the UK, necessary as mass-selling by landlords could potentially destabilise the economy. The Financial Policy Committee (FPC) which is led by Mr Carney, said at the time:

`The stock of buy-to-let lending might be disproportionately vulnerable to very large falls in house prices.`

Stamp duty rises

Since this warning, the Government has also taken action to curb the numbers of buy-to-let investors buying property in the UK. Chancellor George Osborne announced that stamp duty rates for purchases of second homes or buy-to-let properties – basically, any properties that are not the buyer`s main residence – would include a 3% stamp duty surcharge.

This change will come into effect almost immediately, but other such as landlords only being able to claim tax relief on mortgage payments at the basic rate of 20% will apply from 2017 onwards. From 2019, landlords will also have to pay Capital Gains tax within 30 days, rather than having until the end of the tax year to settle their bill.

What do these changes mean for landlords?

The news isn`t all bad for buy-to-let investors. Stricter policies on lending do mean that landlords will need to work harder to prove their income and financial dependability to lenders, but this also means that you won`t ever be granted a loan that you can`t afford to pay back.

By cutting back on the number of properties landlords can buy and finance they can borrow, it also reduces their financial vulnerability to changes in the housing market and economy in general. For example, lenders will now have to assess landlords to see whether they could afford repayments in the case of a 2% rise in interest rates, as well as looking at potential rate rises over the course of five years. Some landlords assume they would be able to afford repayments in such an eventuality, but many may not be able to – this pre-approval check across all lenders could help safeguard against unexpected rate rises.
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