The Bank of England has announced that they are looking into the terms under which buy to let mortgages are being granted to landlords as they are concerned that the individuals will be more affected by a rise in interest rates than other lenders.
The Bank has said in its Financial Stability Report that they will be looking in to all possible ways to tighten some of the criteria that lenders come up against when being offered mortgages for buy to let purposes, such as deposit size and income requirements.
The State of the Buy to Let Sector
Since the financial crisis of 2008, the buy-to-let sector has risen considerably in popularity, rising by 10% in the first nine months of 2015 compared to a rise of 0.4% for owner-occupied properties.
So the market is very much in demand in today’s society, so it should be that more lenders are given more support when applying for a buy-to-let mortgage on their property.
So why is it that the Bank is so worried about the sector? What are the differences in criteria for homeowners and buy-to-let landlords?
The Current Criteria
Generally the criteria that buy-to-let landlords have to meet is a rental income that exceeds 125% of interest payments at a 5-6% mortgage rate, whereas homeowners must meet a higher interest rate of 7%.
However, the Bank of England reported that if the mortgage rates were to raise by 3 points, around 60% of current buy-to-let landlords would find it difficult to repay the mortgage compared to 4% of homeowners.
So why is it that the buy-to-let sector is so unstable? The Bank think it’s because the criteria that are in place are too stringent, and that such mortgages are handed out too easily to individuals. Who apply for loans who aren’t financially stable enough to pay it back.
FPC “Remains Alert” to Stability Risks
The Financial Policy Committee (FPC) in the Bank of England have said that they are aware of the financial stability risks that come along with such a fast growing sector and will be keeping a close eye on it to ensure its solidity.
The report states that “The FPC remains alert to financial stability risks arising from rapid growth in buy to let mortgage lending and notes the difference in underwriting standards in the owner occupier and buy to let mortgage markets, in particular in the typical interest rates used in affordability stress tests,”
With these tighter systems looking like they will be put into place sooner rather than later, what does this mean for the buy-to-let sector? As of right now, nobody is quite sure. Although the Bank of England is confident that they will help control the rapidly growing buy-to-let market, some property experts aren’t convinced, with many predicting that it will only deter new landlords from applying for a buy-to-let mortgage.
Only time will tell and here at Belvoir Sutton Coldfield, we will be following the story and updating you when more information is released. It is important to note that is you are looking into letting a property in Sutton Coldfield, don’t be disheartened. Our advisors are on hand to guide you through the process of everything you need to know and help you find the perfect tenants for your property.
Contact our team today on 0121 321 3388 and have a chat to one of our advisors today.
