Is the government about to introduce stricter affordability tests for buy to let borrowing by Oxford’s landlords?

Regular readers will know that I believe that the recent and planned increase in taxes on buy to let transactions have the potential to undermine the achievement of 6,800 additional rental properties needed in Oxford by 2025 (the stamp duty surcharge since April 2016 and the forthcoming restrictions on interest rate relief).

Today’s headlines suggest that the forthcoming autumn statement will grant new powers to the Bank of England to mandate similar stringent controls on buy to let lending to ensure mortgages are affordable in the event of interest rates rising.  This stress-testing has already been applied for owner-occupiers, but does it have the potential to exclude middle-class investors from the Oxford buy to let market in the future?

Under the plans, affordability checks will be introduced with borrowers having to prove they can make a profit of 25% from rental payments, even if interest rates rise.  For example, an Oxford investor with a £200,000 interest-only mortgage borrowing at a rate of 1.79% today would currently have monthly mortgage payments of £299.  However, should interest rates rise to 5.5% the mortgage payments will rise to £917 meaning that the borrower would need to charge rent of at least £1,146 per month to be approved for a mortgage in the future (probably from April 2017).

So what difference will this make to an Oxford landlord buying a new ‘average’ property as a buy to let?  As our readers know returns on Oxford property come from primarily two sources – rental yield and strong capital appreciation (i.e. properties are increasing in value strongly year on year).  However, the proposed stress test will only take account of rental yield, which typically builds over-time, reflecting the fact that Oxford property prices are high.  For an average property the landlord will buy at around £385,000.  Assuming he/she puts down a deposit of 30% and has a loan to value (LTV) of 70% he/she will borrow £269,500.  Today the mortgage repayments will be £396.  Under the new stress-test at 5.5% they would be £1,235 and require a rent of £1,544 per calendar month.  That is around £170 pcm above the current average rent achievable.  To match the new affordability criteria the landlord would need a further £28,875 deposit (or 37.5% of the purchase price).

For many professional landlords, their established portfolios providing a strong asset base, meaning these changes will make little difference.  But for local people wanting to invest their savings in property to achieve a decent return, it will make the entry cost that much higher, and for some may prove unaffordable.

Increasingly, I am being asked by landlords to help them plan their investments, targeting purchases to optimise yield or capital growth.  I believe the Government focus on buy to let makes advanced careful investment planning more important than ever.  For the Government to be undermining buy to let returns by removing mortgage interest relief and then to add on-top a further affordability test seems unfair, but with careful planning Oxford still offers great return on investment.