The Bank of England's request for extra powers to direct lenders' approach to buy to let investors may mean landlords will soon require deposits of at least 40 per cent according to Countrywide, the UK's largest lettings agent.
It says that if granted, the powers will allow the Financial Policy Committee to ask lenders to exercise additional stress tests on landlord applicants.
For most lenders, landlords are assessed on whether rent generated will cover 125 per cent of the interest component of the mortgage. At present, the interest rate against which the borrower's ability to meet repayments is at the discretion of the lender.
Over the past two years, this rate has typically been around five per cent, translating into 1.2 per cent above the 3.8 per cent rate at which the average landlord secures their loan.
Tested against an interest rate of five per cent, generally the rate which lenders currently use to test affordability, means the typical rent will cover around 165 per cent of the mortgage interest, so easily acceptable to most lenders.
However, some lenders already stress test at interest rates of up to seven per cent. Countrywide fears that while the new Bank of England powers have yet to be formally granted, the implementation of stress testing alongside a potential rise in interest rates would be problematic for landlords.
Stress tested against an interest rate of seven per cent, for example, Countrywide says a third of recently-mortgaged landlords would have had to increase the amount of equity they put down, amounting to an additional £40,000 on average.
Stress testing new loans for investors has the potential to increase entry barriers. It will primarily affect areas in the south and areas where yields are lower. If the proposals are implemented, would-be landlords will have to put down increasingly larger deposits to meet more stringent lending criteria says Countrywide's Nick Dunning.
The high value nature of parts of London and the south east mean many landlords will find themselves having to put down deposits upwards of 40 per cent he warns.
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Comments
Many investors I speak to have grown far to acustomed to the low base rate that is reflected in their mortgage payments, which is very unnerving. Educating people to invest outside of their comfort zone to gain a balanced portfolio hedging the high value low yield property in the south that's great for parking capital and growth over the long term paired with high yield low value property in the north. Balance and planning, including risk management, is crucial to the success of all property owners, landlords and investors.
In reality this means zero, or almost zero, risk for the lender. So the interest paid to them is, as they say, 'money for old rope' or 'a license to print money'. The 'suits' are certainly looking after themselves!
This is a real threat and why more and more southern landlords will be looking further afield to build their portfolios rather than trying to buy into an already overheated market down south