New rules to squeeze buy-to-let investors
PROPERTY investors will face tough new mortgage affordability tests from next year which will herald the “beginning of the end of the middle-class buy-to-let dream”, experts warned last night.
Philip Hammond, the Chancellor, yesterday announced additional rules on buy-to-let which will result in ordinary investors being able to borrow far less towards their purchase.
Mr Hammond indicated he was concerned about “financial stability” after a boom in residential property investment as savers desperately try to find profitable places to put their money.
Many have turned to buy-to-let to fund retirement income after being effectively barred from putting more money into their pensions by the Government. Low mortgage rates have made the investments attractive.
However, ministers have recently targeted buy-to-let properties with aggressive new taxes, including higher rates of stamp duty and the removal of tax relief on mortgage interest.
Experts fear that yesterday’s announcement will make the investments unaffordable for many middle-class people, closing down another potential saving opportunity.
Mr Hammond and Theresa May, the Prime Minister, are expected to come under pressure to ease the burden on savers with tax breaks or government help in next week’s Autumn Statement.
Under the plans to give the Bank of England extra powers, affordability checks are to be introduced for investors, who will now have to prove they can make a profit of 25 per cent from tenants even if large interest rate rises make their mortgage more expensive.
The Chancellor said: “It is crucial that Britain’s independent regulators have the tools they need to keep our fi- nancial 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.”
Ray Boulger, from John Charcol, a mortgage adviser, said: “The rationale for these stress tests are the same as those which were brought into the residential market to avoid people being unable to repay their mortgages if interest rates rise. If interest rates were to move up quickly that would cause buy-to-let investors a huge problem as they are too acclimatised to low rates. If rates rose sharply and they were unable to repay their mortgages en masse, the market could suddenly be flooded with properties.”
From Jan 1, the Prudential Regulation Authority, the lending arm of the Bank of England, will impose new minimum affordability thresholds which will reject borrowers who can make less than 25 per cent profit from their investment, or who would no longer be able to afford mortgage repayments if interest rates rise to 5.5 per cent.
For example, someone with a £200,000 interest-only mortgage borrowing at 1.79 per cent would have monthly mortgage payments of £299. However, as these repayments would rise to £917 if their rate of repayment interest rose to 5.5 per cent, they would need to prove they could charge rent of £1,146 a month before being approved for the mortgage.
As the Bank rate is at a record low of 0.25 per cent, mortgage deals are currently cheaper than ever, with many charging less than 2 per cent interest.
Andrew Montlake, a director at Coreco, a mortgage broker, said: “Many people will see this as the beginning of the end of the middle-class buy-to-let dream, which is a big shame.” Until
THE Government’s Lifetime Isa will be an unsuitable investment for most savers, say City watchdogs, as they set up strict protections to stop the accounts resulting in a mis-selling scandal.
In a consultation paper published yesterday, the Financial Conduct Authority warned that savers with generous pension arrangements – and higher earners who benefit from 40 per cent tax relief – may lose out if they choose to save into a Lifetime Isa as it could give them a smaller retirement fund.
The FCA also said it would not be “rational” for savers to invest in the accounts unless they had an adequate emergency fund saved in cash.
Savers will be able to use the Lifetime Isa to save up to £4,000 each year and receive a Government bonus of 25 per cent. They can use some or all of it to buy a first home worth £450,000 or less or keep it until they are 60.
Savers withdrawing money before the age of 60 for anything other than a qualifying house purchase will lose their bonus and be hit with a 5 per cent exit fee. The FCA said: “Rational investors would invest in a Lifetime Isa [Lisa] only in the presence of a reasonable expectation of not needing the funds before age 60 or of buying a first home. It would therefore not be rational for a consumer to invest in a Lisa without first having some liquid savings – savings that carry no withdrawal charge – to cover unforeseen expenses.”
It stopped short of requiring savers to take financial advice before investing in a Lifetime Isa, but has proposed tough new rules calling for providers to issue risk warnings to savers, remind them about the impact of charges and the exit penalty, and let people cancel for up to 30 days following a sale.
Steve Webb, director of policy at Royal London, said: “There is a real risk of a ‘mis-buying’ scandal as the wrong people take out Lifetime Isas.”
A Treasury spokesman said: ‘The Lifetime Isa will help people save for later life in a way that works for them and we have always been clear that it is not a replacement for a pension.”
A number of experts have called for the scheme to be scrapped before it is launched next April.