Currencies

China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

Continue Reading

Banks

Carney: UK is ‘investment banker for Europe’

The governor of the Bank of England has repeated his calls for a “smooth and orderly” UK exit from the EU, saying that a transition out of the bloc will happen, it was just a case of “when and how”. Responding to the BoE’s latest bank stress tests, where lenders overall emerged with more resilient […]

Continue Reading

Currencies

China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

Continue Reading

Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

Continue Reading

Banks

Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

Continue Reading

Categorized | Property

Buy-to-let borrowers to face more scrutiny


Posted on September 29, 2016

London 2012 - Districts Of London - Stratford...LONDON, ENGLAND - JANUARY 17: New apartments near the site of the Olympics on January 17, 2012 in London, England. The London 2012 Olympics will commence on July 27, 2012. (Photo by Peter Macdiarmid/Getty Images)©Getty

Lenders said the changes would reduce the number of landlords with only a small number of buy-to-let properties

Buy-to-let borrowers will face more scrutiny from January because of new affordability checks and mortgage repayment “stress tests”.

The Bank of England’s Prudential Regulation Authority will for the first time ask banks and specialist lenders in the sector to verify that landlords can afford to pay the mortgage in a scenario where interest rates rise to 5.5 per cent.

    It is also recommending that the “interest coverage ratio” — the ratio of rental income to mortgage payments — is at least 125 per cent.

    Lenders said these changes would further professionalise the market and reduce the number of landlords with only a small number of buy-to-let properties. The government has announced that from 2017 there will be new limits to the tax relief landlords can claim on mortgage interest payments and, as of April 2016, anyone buying a second property must pay an extra three percentage points of the value in tax.

    Though the BoE has said the interest coverage ratio should be at least 125 per cent, lenders are likely to set a higher threshold of 145 per cent, in anticipation that buy-to-let mortgages will be less affordable because borrowers are losing some of the tax relief on their interest payments.

    Lenders such as The Mortgage Works, a subsidiary of Nationwide, and TSB had already moved to 145 per cent during the PRA consultation on the changes. The effect will be that buy-to-let borrowers will be offered smaller mortgages against property values.

    Steve Olejnik from buy-to-let mortgage broker Mortgages for Business, said it was “the end of 125 per cent” for individual borrowers.

    “The Bank of England is assuming that every borrower is a higher rate taxpayer. If you feed that into your affordability model, then 125 per cent does not work.”

    Buy-to-let: the asset class that dare not speak its name

    Estate agents' 'Let By' signs stand outside residential properties in Romford, U.K., on Friday, March 11, 2016. Bank of England Governor Mark Carney and his colleagues have repeatedly said a surge in buy-to-let property investment may pose a risk to financial stability. Photographer: Chris Ratcliffe/Bloomberg

    A new generation of haves and have-nots — those who own a rental property and those who live in one

    However, he said the 125 per cent rate would still apply for landlord businesses held as limited companies — an increasingly popular form of ownership. Mr Olejnik said 63 per cent of his company’s buy-to-let borrowers were now buying through corporate structures, up from 18 per cent two years ago.

    The BoE made its initial proposals for tighter buy-to-let affordability rules in March, with the aim of preventing landlords from getting into difficulties if their income dropped or interest rates rose sharply. A consultation on the proposals ended in June.

    Strict new affordability checks for other parts of the mortgage market were introduced in 2014.

    As an alternative to the interest coverage ratio test, lenders can use a borrower’s personal income to justify a loan — but landlords will have to provide details of personal finances including evidence of income, pensions, savings, tax liabilities, credit card debt or car loans, utility bills and spending on food and childcare. “Lenders are going to have to be a lot more curious about customers’ income,” said Mr Olejnik.

    Questions arose during the consultation about whether lenders could assume that landlords would raise rents to help meet mortgage payments. The PRA has yielded some ground on this, allowing lenders to assume rental inflation up to 2 per cent a year.

    It has also waived a 5.5 per cent “stressed” interest rate test for fixed-term loans of five years or longer, though lenders noted it had reserved the right to change this if this type of loan became popular.