Buy-to-let investors 'may have to stump up more equity'

Buy-to-let investors face having to inject much bigger amounts of cash into their properties due to changes to the market, an expert has warned.

The Bank of England has set out plans for tightening rules around buy-to-let lending.

On Thursday, the Bank's Prudential Regulation Authority (PRA) outlined minimum expectations that firms should meet in underwriting buy-to-let mortgages, saying affordability assessments should take into account borrowers' costs including tax liabilities and possible future interest rate increases. The PRA said changes should start coming into force from January 1 2017.

The PRA said its actions "are intended to bring all lenders up to prevailing market standards".

Buy-to-let investors have already faced a three percentage point hike in stamp duty rates when purchasing properties. The increase came into force on April 1.

Richard Donnell, insight director at Hometrack, said: "The introduction of underwriting standards for buy-to-let bring this small but important sector of the mortgage market in line with the rest of the market."

He predicted some investors may find they need to inject a further 10% of the property price into their investment.

Mr Donnell continued: "Together with the 3% extra stamp duty from April that means investors having to stump up 13% more equity to buy an investment property with a mortgage compared to the start of the year.

"A typical two-bed property will require investors having to put in an extra £25,000 to £35,000 of equity for the mortgage...

"The net result will be a further weakening in demand for buy-to-let loans and a move by investors into higher-yielding rental markets where the affordability test is easier to pass."

But Paul Smee, director general of the Council of Mortgage Lenders (CML), said the new underwriting requirements broadly reflect existing practice.

He said: "While the regulator will need to keep the impact of the new requirements under review, we expect the effect to be modest under current market conditions, and we do not anticipate the measures resulting in any shock to the market."