Buy-to-let lending squeeze: 'some banks won't lend at all' (2024)

Stringent new rules for mortgage lending to buy-to-let investors with multiple properties could mean that some can no longer borrow to fund their business, Telegraph Money research has found.

Buy-to-let investors with four or more properties will find it harder to raise finance from the end of this month when tough lending regulations are introduced by the Prudential Regulation Authority, part of the Bank of England.

Landlords who seek finance after October 1 will have their entire property portfolio assessed for viability, as opposed to just the individual property concerned, as is currently the case.

Brokers surveyed by this newspaper said the changes would mean, at best, a huge increase in the amount of work landlords will have to do when they apply for a mortgage and, at worst, some landlords struggling or failing to get a loan at all. The market could also shrink as banks abandon this part of the market entirely. This would be likely to lead to higher fees and interest rates.

Buy-to-let lending squeeze: 'some banks won't lend at all' (1)

One of Britain’s biggest lenders, Santander, has already told mortgage advisers that it will cease lending to landlords with large portfolios who want to increase their borrowings. It will continue to lend for the purposes of “pound-for-pound” remortgaging, but even then only with tighter rules around purchase date and income.

Shaun Church of Private Finance, a broker, said: “Already we are seeing the mainstream lenders taking very different approaches to how they will work with these borrowers.

“Some are saying that if you have four or more properties we aren’t going to lend to you at all – probably because they don’t have the resources to deal with the extra workload. In the middle some are saying we will lend but it’s going to become much more complex.

“Then some of the more specialist lenders are more or less enforcing the rules already so there won’t be much change.”

Ray Boulger of John Charcol, another broker, said some smaller lenders such as Platform Home Loans had announced that they would no longer be carrying out this sort of work, while other, specialist lenders would be largely unaffected.

The new rules will apply only to individual landlords, not to those who own their portfolio through a limited company.

Who will be the winners and losers?

The rules are likely to place significant barriers in the way of many landlords, particularly those with larger portfolios. “How can you really expect to check someone with 100 properties or more?” Mr Church said. “It will become exponentially more difficult for them to get finance.”

Experts warned that, in addition to the extra work involved, a fall in the number of lenders prepared to operate in this market would lead to increased costs for borrowers.

“Whenever there is less choice and competition we always see an increase in cost,” Mr Church said. “It’s fair to say the cost of borrowing for portfolio landlords is likely to increase. If your lender had a rate that was market leading, you could well see that change.”

Mr Boulger said: “There will be a reduction in the number of lenders prepared to do this. Those that do still offer mortgages will be required to jump through a lot more hoops and borrowers will have to provide more information.”

Buy-to-let lending squeeze: 'some banks won't lend at all' (2)

And the nightmare scenario for landlords is finding themselves unable to remortgage. This could lead many to become “mortgage prisoners”, locked on their lender’s variable rate, which is usually much higher than the alternatives.

Mr Boulger said it was “inevitable” that some landlords would fall into this category, albeit a relatively small number.

“The people most at risk will be those in parts of the country where property values have done badly,” he added. “In London and the South East the chances are you will have seen quite a big gain, but in parts of the North and Northern Ireland prices have remained very low. This won’t help.”

But some banks could, if they master the new rules quickly, steal a march on their rivals. Mr Church said: “I think the winners are going to be the new ‘challenger’ banks. They will be coming in fleet of foot and will be able to make changes more quickly than the big banks. The likes of Halifax making changes can be more like turning an oil tanker.”

What can borrowers do?

As limited companies are unaffected by both these regulatory changes and the separate tightening of tax relief, it will be tempting for new landlords to choose this structure.

Borrowing as a limited company will mean you pay higher mortgage rates and have the other administrative costs involved in running a company, but is likely to be cheaper in the long term.

However, it would be very expensive for established landlords to transfer their portfolio to a company as it would create stamp duty and capital gains tax liabilities.

Instead, those investors should consider applying for any loans they need straight away. Mr Boulger said: “If you’re looking to remortgage at the moment get in quickly because some lenders are still working to the old rules. There will be less choice in a few weeks when the new rules come into force.

“One of the interesting questions is whether lenders will take a global view,” he said. “Will they want every property in a borrower’s portfolio to be viable, or if one or two are not making money but the portfolio is viable overall will that be acceptable?”

He added that more stringent requirements on personal income were likely to make a big difference to landlords at the margins – and drastically reduce their level of choice.

How will the wider market react?

The buy-to-let market has had a tough few years. First in April last year the 3 percentage point stamp duty surcharge on second purchases created an extra cost to expanding your portfolio, and then the changes to income tax relief began to bite earlier this year.

By 2020 landlords will be unable to offset mortgage interest from their taxable profits, meaning a higher tax bill for most. Basic-rate taxpayers will receive a 20pc tax credit, so the change will primarily affect higher earners.

Lenders have also been forced to “stress test” their loans at a hypothetical interest rate of 5.5pc, despite mortgage rates generally being at an all-time low.

But the latest changes to portfolio landlords could be the worst blow of all. Mr Church said: “I don’t think people have really realised how far-reaching the impact on the market will be.

“We’ve had the tax changes and we’ve had plenty to deter the amateur landlord with the stamp duty surcharge, but actually this is the one that will affect the rest of the market and the big boys.”

Buy-to-let lending squeeze: 'some banks won't lend at all' (2024)

FAQs

Why are banks not willing to lend to certain borrowers? ›

Ans: The banks may not lend certain borrowers due to the following reasons: Banks require some necessary documents and collateral as security against loans, some persons fail to meet these requirements. The borrowers who did not repay their previous loans, the banks do not lend them further.

Why are banks not lending right now? ›

Banks Aren't Lending to Businesses – Here's Why That Matters. Banks aren't what they were a few years ago. Crippled by a high-rate environment and an inflationary economy, the banking industry is tightly holding onto their deposits instead of lending the cash to small businesses.

Why do banks not want to lend? ›

Debt-to-income ratio

Big banks are wary of lending to businesses that have existing debt with other lenders. In many cases, they won't even consider lending to a business that has already taken financing.

Why banks are not giving loans? ›

Collateral is an asset that the borrower owns such as livestock, buildings, vehicles, and deposits with banks) and uses this as a guarantee to a lender until the loan is repaid. Usually, poor people or farmers may not have sufficient collateral to get loans from the banks.

How do banks decide who to lend to? ›

For an individual, for example, a bank will look at the person's credit history, credit score, current liabilities, current assets, and income from a job, to decide whether a person has a fairly safe credit profile to lend money to; the goal is for the bank to make a decision so they can ensure the money they lend out ...

Can banks lend to anyone? ›

Banks often look for borrowers with good credit scores and strong credit histories. If your credit score is low, you can consider getting a co-signer for your bank loan. If the co-signer has a higher credit score, this can increase your chances of getting approved.

Are banks tightening lending? ›

A January survey from the Federal Reserve showed that the share of banks who tightened lending standards for commercial and industrial loans fell to 14.8% in the fourth quarter. That's down from 33.9% in the third quarter and a significant drop from 50.8% in the second quarter of 2023.

Are banks cutting back on lending? ›

Higher interest rates prompted banks to restrict lending. In a Fed survey last summer, many banks said they had tightened lending standards. Almost no banks said they had made borrowing easier. Some banks continue to tighten credit standards in 2024, according to the latest Fed survey, taken in January.

Why is it so hard to borrow money? ›

The banks revealed that they are being more strict with their loan standards for multiple reasons, including: an uncertain economic outlook, a decreased risk tolerance, funding cost concerns, and effects of legislative changes.

Why is it hard to get loans right now? ›

Americans are having a harder time getting approved for auto loans, as banks worry over the risk of defaults at a time when high interest rates and elevated car prices are squeezing budgets. With borrowers struggling to make their monthly car payments, banks are responding by tightening credit standards.

Is it harder to borrow money now? ›

Loan rejections are up

According to the Federal Reserve Bank of New York's June Survey of Consumer Expectations, the overall rejection rate for credit applicants increased to nearly 22%, the highest level since June 2018.

What happens to bank loans when bank fails? ›

Either the FDIC sold your loan at closing or the FDIC has retained it temporarily. In either case, your obligation to pay has not changed. Within a few days after the closure, you will be notified by the FDIC, and by the purchaser, as to where to send future payments.

Why are so many banks struggling? ›

The increase in mobile banking use, inflation and interest rates, and real-estate struggles all contributed to why 2023 experienced so many banks shutting their doors. These issues caused Silicon Valley Bank to collapse in March 2023, with First Republic Bank and Signature Bank following only a few months later.

Why are so many banks in trouble? ›

Powell: 'There will be bank failures' caused by commercial real estate losses. Federal Reserve Chair Jerome Powell said Thursday he expects to see some banks fail due to their exposure to the commercial real estate sector, which has declined significantly in value following the shift to remote work.

Why is it so hard to get a mortgage today? ›

Making sure you stay on top of your credit and are in a good financial position are two easy ways to be approved for a loan. Why is it so hard to get a mortgage today? Because of the home prices and high-interest rates, they are pushing up monthly payments, making it harder for buyers to get a mortgage to start.

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