The Bank of England has been granted new powers by the government to regulate the buy-to-let mortgage market to help guard against any future potential risks to the economy.
From next year, the Bank’s Financial Policy Committee will be able to direct regulators to require lenders to place limits on loan-to-values and interest coverage ratios of mortgages.
These changes will give the Bank the ability to restrict the value of the loan relative to the size of a property and the amount of rent landlords receive.
This could force landlords to hike rents and put down bigger deposits in order to get a loan.
The Chancellor, Philip Hammond, said: “It is crucial that Britain’s independent regulators have the tools they need to keep our financial system as safe as possible.
“Expanding the number of tools at the Financial Policy Committee’s disposal will ensure that the buy-to-let sector can continue to make an important contribution to our economy, while allowing the regulator to address any potential risks to financial stability.”
The BoE has warned that the buy-to-let market is a potential threat to the UK’s economic recovery and that borrowers could be exposed following a downturn, which could hit the wider housing market and economy.
In response to the changing landscape some lenders have already increased the amount of rent that landlords need to charge relative to their mortgage costs.
Most lenders currently stress test their mortgages so that rental income covers 125% of mortgage payments, known as the interest coverage ratio.
While there are still lenders offering buy-to-let mortgages at this rate, many experts expect this to change in the future.
Already this year, Nationwide and Barclays have both tightened up their lending criteria for buy-to-let landlords by upping their rental ratio cover from 125% to 145% and 135%, respectively.
In September, the Bank’s Prudential Regulation Authority confirmed it will introduce tougher underwriting standards and affordability assessments to make sure borrowers can cover the cost of their mortgage in the event of an interest rate rise.
The PRA said that lenders will be required to set a minimum borrower rate of 5.5% during the first five years of a buy-to-let mortgage contract when assessing affordability, set to be introduced from 1 January next year.
Lenders will also have to take into account annual rent rises of 2% when assessing whether a landlord can afford a property.
Portfolio landlords with four or more rental properties will be subject to stricter checks on income and debt.
These changes to underwriting standards are expected to reduce the number of new approvals for buy-to-let mortgages by about 10% to 20%.
The FPC introduced regulations in 2014 to cap riskier mortgage lending to make sure the market did not overheat.
Banks and building societies must now ensure they do not lend more than 15% of residential mortgages at more than 4.5 times a borrower’s income.
