At a recent client meeting we found ourselves reminiscing about the halcyon days from 2003 to 2007, when buy to let lending was relatively easy, and when banks looked on a rental property portfolio as an asset rather than a liability, which also made it far easier to raise capital for new acquisitions.
How things have changed! Many landlords have said to me over the last few weeks that the walls are closing in, what with the punitive extra stamp duty, the possibly game-changing removal of interest-rate relief, and local authority licensing. From the chancellor’s Autumn Statement it seems even more pain is on the way.
We’re just beginning to see the real impact of the restrictions on buy to let lending introduced earlier this year, in particular the higher levels of “stress testing” on affordability. Lenders are now recalculating these stress tests to take into account the increased tax burden on private landlords paying higher tax rates. Most lenders will now be looking for 155 per cent rental income coverage of costs (based on an interest rate of 5.5 per cent).
Even in the recent past, normal loan to value (LTV) ratios have been between 70 and 80 per cent. From conversations with trusted and experienced mortgage brokers, the maximum LTV ratio on Central London property could fall to around 65 per cent as a consequence of the new rules on stress testing. This means in effect that landlords will need to find more capital for new portfolio investments, and it’s going to be harder to raise equity on their current portfolio.
Inevitably investors could be looking further and further out of London for lower entry level stock. Maintaining a rental property portfolio in Central London could become the preserve of the very wealthy.
The overall effect on property values and the market is harder to predict. On the one hand having a smaller pool of prospective buyers could lead to a cooling of the market and a drop in resale value. On the other hand if there is less new private rental property coming up for sale values may benefit.
For a detailed report on the changes to lending criteria and the likely effect on London properly take a look at this piece on the Council of Mortgage Lenders website.
By Jaimie Beers
Jaimie Beers is managing director of Madley Property.