Change in EU law could end buy-to-let
Proposed new EU legislation could effectively end the buy-to-let housing market for all but the highest of earners or those with larger amounts of capital. Under the proposed new directive, lenders would need to look at the proposed borrower’s income and general ‘creditworthiness’ and not at the projected rental income for the property, as opposed to current practice where the profitability of the property as a rental unit is taken into account. If the proposed borrower’s finances are not sufficient, the lender will not be able to lend. When assessing creditworthiness, the directive will aim to look at income, savings, debts and other financial commitments. There is no explicit provision for looking at income that a property could yield as part of this assessment. The result of this could be that only those who have high incomes could afford to invest in a property for the purposes of buy to let. There could also be implications for those who need to re-mortgage, particularly if they have come to the end of a specific deal.
The buy-to-let market boomed along with the housing market during the last decade until the global financial crisis. Up to that point, the availability of credit enabled those with even a modest income to become a landlord, with the promise of an almost guaranteed increase in the value of the property in a relatively short space of time. The tenant would pay the rent, and therefore the mortgage. Many may have borrowed on the value of the first property to finance a second buy to let purchase – clearly creating the potential for a domino effect if the directive comes into force.
The worst case scenario is that in the absence of available buy-to-let products, availability in this sector of the rental market could shrink rapidly, leaving a huge gap in the market. It could drive already high rental prices upwards and property values downwards due to a flood of property being sold because mortgages cannot be obtained. Whilst some say this will restore house prices to a more realistic and affordable level for those entering the market for the first time, it will cause problems for some if they need to sell but have a high loan-to-value loan and experience a significant drop in value.