The Council of Mortgage Lenders has revised it buy-to-let growth forecast downwards to reflect tax and prudential burdens in the housing and mortgage markets. The industry trade body said it now expects buy-to-let lending of £35 billion in 2017 and £33 billion in 2018, compared to the £38 billion in each year made in December’s forecast. Buy-to-let […]
The Council of Mortgage Lenders has revised it buy-to-let growth forecast downwards to reflect tax and prudential burdens in the housing and mortgage markets.
The industry trade body said it now expects buy-to-let lending of £35 billion in 2017 and £33 billion in 2018, compared to the £38 billion in each year made in December’s forecast.
Buy-to-let lending has had a weak start to 2017 and the sector’s contribution to overall net mortgage lending has fallen considerably over the last year.
Paul Smee, CML director general, said: “While falling mortgage interest rates have helped support borrowing, tax and prudential measures are exerting pressure on the buy-to-let market. Following the distortion of the stamp duty change on second properties last year, we expected a slight recovery in lending levels.
“However, this has not materialised, and we therefore have lowered our forecast for buy-to-let lending this year and next.”
Landlords have been hit by a raft of changes in the past year as part of the government’s plan to rein in buy-to-let investment.
Last year, the government increased stamp duty on second homes by 3% to help free up property for first-time buyers.
Mortgage interest relief for residential buy-to-let properties has been reduced to the base income tax rate, which is 20%. Landlords were previously able to claim tax relief on the top rate of tax of up to 45%.
The change means landlords will no longer be able to deduct mortgage interest payments or any other finance-related costs from their turnover before declaring their taxable income.
“We have not yet seen any sudden contraction in lending as a consequence, but it will make landlords more cautious and is likely to restrict their ability to re-leverage their portfolios,” the CML said.
The Bank of England’s Prudential Regulation Authority also introduced tougher underwriting standards and affordability assessments on 1 January to make sure borrowers can cover the cost of their mortgage in the event of an interest rate rise.
Lenders must now stress test all buy-to-let mortgages at minimum rate of 5.5% during the first five years. This has led to most lenders tightening up their criteria by upping their rental ratio cover from 125% to 145%.
The CML said that this has made it more difficult to sustain a highly-leveraged buy-to-let business model, leading to negative repercussions in regional markets with low rental yields.
For example, in London the median LTV for remortgage loans has declined from around 65% in early 2014 to about 57%. In contrast, Manchester’s median remortgage LTV has held roughly steady around 70% over the same time frame.
In response to the new PRA regulations, there has been a modest rise in the proportion of loans taken out on fixed terms of five-years or longer which are exempt from PRA stress testing, the CML said.
From October, the PRA will also be introducing stricter checks on an applicant’s financial history, while landlords with four or more properties will be classed as portfolio landlords.
“This re-emphasises the case for avoiding further changes to the tax and regulatory framework until the effect of these already in train have been properly assessed,” said Smee.
Surge in mortgage lending
Despite election and Brexit uncertainty, monthly mortgage lending surged by 12% in May to £20.1 billion.
Paul Smee, CML director general, said: “Remortgage activity and first-time buyers continue to drive lending this year. Looking ahead, we expect to see this trend continue, but not as strongly, as the factors supporting lending are blunted by less favourable economic conditions.
Jeremy Leaf, north London estate agent and a former RICS residential chairman, said: “These figures are quite encouraging as the monthly increase is higher than might have been expected in the period leading up to the general election.
“But of course they do reflect buying decisions made earlier in the year and money not advanced until usually a few months later.”
