Back in 2014, the Mortgage Market Review placed a duty of care on lenders who offered mortgages for residential property. This obligated them to ensure that potential borrowers would be capable of managing a mortgage over the long term, taking into account feasible changes in circumstances, such as the arrival of children. From early 2017, buy-to-let mortgages will be subject to similar rules.
The landlord stress test
By the start of 2017, all lenders must ensure that applicants for BTL mortgages would be able to meet their repayments if interest rates rose to 5.5%. The only exception is if a BTL mortgage offers a fixed rate for at least five years.
Protecting both tenants and landlords
If a landlord runs into difficulties with their mortgage, tenants may find themselves in a precarious situation. In the case where a landlord has a proper buy-to-let mortgage, tenants are highly unlikely to face immediate eviction, in fact, they may be allowed to stay in the property and pay rent to the new owner. There is, however, no guarantee of this and they may be requested to leave either at the end of their contact or by the end of a statutory notice period. This would allow the creditor to sell the property to recoup their loss on the debt.
At the same time, even though BTL landlords do not (usually) live in their rental properties, they may have used other property as collateral, including their family home. The whole point of collateral is that a lender can seize it in the event of a borrower being unable to pay their debt, hence BTL landlords who over-extend themselves can actually find themselves at risk of losing their own family home.
The impact on the rental market
It’s still rather early to say what effect this will have on the rental market. On the one hand, there is nothing to stop landlords using shorter-term fixed rate deals (or variable-rate mortgages), provided that they can demonstrate they could cope if interest rates rose to 5.5%. On the other hand, some landlords may not be able to do so and may feel that a “worst-case scenario” of 5.5% interest is unrealistic given the current low-interest-rate environment (although it must be said that interest rates went much higher than 5.5% in both the early 1980s and the early 1990s, reaching well into double figures).
Landlords in the latter situation really only have two options. One is to sell any existing properties and move into another form of property investment and the other is to look for fixed-rate deals of five years or more. As these deals are somewhat riskier for lenders (since they will take the brunt of any interest-rate rises), they tend to have higher rates, thus making them superficially more expensive. On the other hand, the remortgaging process is very similar to the initial mortgaging process and involves a lot of the same expenses. Landlords on two-year deals would have to remortgage 1.5 times over the same five-year period and absorb the associated costs (and paperwork). With this in mind, it may be that these changes are actually something of a storm in a teacup with little to no practical impact on landlords at all.
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