Bank of England Buy to Let affordability rules update

Whilst I can see that this will trap some BTL borrowers into higher rate standard variable rates I do actually follow the logic on this move.

When I first started working as a broker in the early 90's the lending criteria was 10 times annual rent (Yorkshire Bank).

Given that interest rates will will eventually increase (long term predictions are now circa 3%) and that running costs for most landlords (excluding mortgage interest) are circa 25% to 40% of gross rent I think the BOE's move makes a lot of sense.

I've seen lenders willing to advance up 20 times annual rent (240 times monthly rent) over the last decade or so and have always thought to myself this is highly risky in the long term, not just for them but also their borrowers.

Buy to Let should be an investment to produce positive cashflow as an alternative to depositing savings elsewhere in my opinion.

I appreciate that my views will be seen as controversial to those whose strategies are based heavily upon speculating on capital appreciation but I've always recommended a cautious approach to stress testing as my private consultancy clients will testify to.
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Is this ltd co loans too or just for individual borrowers?

I am assuming both for now as they are largely the same loan.

Whilst it could have been far worse (e.g. ban IO loans), the outcome of this exercise should be expected to be lower LTVs available for BTL LL's.

Roughly roughly, £100k borrowed at stress test interest rates of 5.5% = £5,500 interest. This would (if I have read the meaning of clause 2.4 in the BOE document correctly) have to be covered 125% net of income tax for the LL.

So, for a 40% tax payer, that would mean that £100k borrowed would need £11,458 rental income. If property yield is 6%, that implies the £100k loan could only work where the price of the property was £191k (52.3% LTV)

If clause 2.4 does not mean that the 125% cover is from after tax income, the above sums are wrong and can be ignored, but I rather think that is what clause 2.4 means

Also, for Portfolio Landlords (4+), I think the number of lenders will likely decrease due to the requirement for more specialist underwriting.

Any responsible property investor will already be employing such methods as suggested by the BoE.

I just hope it doesn't impact the many accidental landlords out there. I imagine landlords that are highly geared will be worried when they exit their fixed deals.

They talk base rate of 5.5%. So if they have 3% margin over base (e.g. 3.5% mortgage) then they need to stress test at 8.5%? If they have something like 4.5% over base then it is stress tested at 10%?

After reading the actual document it appears that they are proposing an minimum of 5.5% stress test if the current rate plus 2% falls below this amount.

The article above leads to some confusion with the use of "base rate" of 5.5%as often the term base rate refers to the BoE base rate. Should have probably used a slightly different terminology.

As some have said LL should be stress testing at these sort of rates or 2-3% over the rate of the mortgage they have or anticipate to have. I have always stressed at +2 to +3% of the expected rate to be sure.

Well me too. I've never, ever, taken on more than was easily affordable and have always used stress tests of my own over and above the mortgage requirements to check my affordability. However, as someone just hoping to get a limited company off the ground, these new requirements aren't exactly going to be conducive to investment. Which I suppose is the point.

There is one, tiny, minuscule glimmer of positivity though - at least when we're taxed to the eyeballs, unable to buy or renovate because of SDLT, and unable to buy affordable property because of the stress tests, at least the anti-landlord brigade won't be able to whinge about how we're to blame for the housing crisis and how we don't contribute enough to the economy!

Reply to the comment left by "Mark Alexander" at "29/03/2016 - 13:00":

I generally agree with your post Mark A, although the anarchic LL haters who permanently monitor this forum may try and make a big deal about the use of the word ‘investor’ elsewhere and everywhere.

I may be wrong but I can see the logic behind today's ‘move’. Most lenders were already applying the stricter lending criteria anyway, so it makes sense for those with looser lending criteria to follow suit for a number of reasons. Obviously it would make no sense for lenders with weaker lending criteria to have market advantage with customers, if there is any financial stability risk to the wider economy.

Sorry to bang on, but I could also see the some logic with the SDLT hike, EVEN if it potentially adversely affects me, although worth repeating that larger purchasers pay lower SDLT on commercial terms.

If pushed, I could even see some sense in SOME elements of the licensing schemes that I now have to comply with.

For me, once again, today’s ‘news’ merely highlights how nonsensical GO’s (or rather his wealthy corporate LL sponsors’) C24 short term tax grab was, for a multitude of reasons that have already been discussed at length.

This is what they should have done at the start instead of C24, this closer fulfills every aim Gauke and GO set out for C24.