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Busy lenders' monthly round-up - December 2015

Welcome to TLT's busy lender's monthly round-up. Each month we summarise the latest news and developments in mortgage litigation and regulation.

This month in summary 


  • Banks bringing in tougher checks on buy-to-let mortgages
  • CML review on lending into retirement
  • Friends with mortgages

Economic outlook

  • Impact of the US interest rate increase
  • Will £40 billion deficit require Bank of England intervention?
  • Buy-to-let: a risk to the economy?


  • Rents to rise faster than house prices
  • New CML chairman
  • Young home ownership falls
  • Scotland - buy-to-let stamp duty to rise
  • Northern Ireland - house price increase takes the lead


Banks bringing in tougher checks on buy-to-let mortgages

In light of the government's announcement of cuts to tax relief for mortgage interest payments for buy-to-let investors from April 2017 and the Bank of England's concerns that landlords will be exposed when interest rates rise from record lows, banks and building societies are imposing tougher checks on buy-to-let mortgage applications.

Historically, affordability checks on these mortgages were less stringent than those for standard home loans with a focus on the ratio of rental income to mortgage interest repayment.

Barclays and NatWest have already implemented changes, as has the Coventry Building Society. Coventry customers will have to now demonstrate that they will be able to cope if interest rates rise to 5.5% as well as the rental income being 125% of the mortgage interest repayments. Barclays now require a rental income of 135% of the mortgage interest repayment.

Along with the announcement of the increase in stamp duty to 3% for-buy-to-let properties some are saying that this is the end of the buy-to-let dream for many middle class families. David Hollingworth from mortgage broker London & Country says "Prospective new landlords may be forced into a rethink and be wondering if the buy-to-let dream is moving beyond their reach. A hike in stamp duty, changes to the tax treatment and now lenders tightening up on what they will lend will hit aspiring landlords hard."

CML review on lending into retirement

The Council of Mortgage Lenders (CML) has recently carried out a comprehensive review of lending into retirement and the potential solutions to the problems that lenders currently face (and are likely to face with increased regularity in the future).

Whilst the Mortgage Market Review resulted in relatively strict regulation around lending into retirement, lenders are now taking a more liberal approach. However, the problem remains…

The report outlines that the ability to pay off a mortgage post-retirement is just one of many issues that need to be considered when a mortgage term extends beyond a borrower's retirement date. It is also necessary to consider issues such as unsecured borrowing, pensions, savings and equity release, together with mortgage requirements.

Of course, the problems of lending into retirement are at their most stark when considering interest-only mortgages. The CML considers that flexible, repayment and interest-only roll-up products for those aged between 50 and 75 would prove popular in the market, with a view to realising a controlled and predictable opportunity for redemption post retirement.

If the CML's recommendations are taken on in the market, borrowers will be able to look forward to improved service and increased levels of information to assist them in planning for the future. Lenders may benefit from the demand for new bespoke products which will inevitably become more popular given the UK's aging population.

Friends with mortgages

Chandler, Joey, Monica and Rachel buying a property together? Not as strange as it sounds - lenders are offering to lend to groups of friends in order to help people onto the housing ladder. Lenders including Barclays, Woolwich, Lloyds and Natwest can accommodate up to four friends with respective shares depending upon each person's contribution.

Taking into account the buoyant property market, particularly in London where first-time buyers in the capital require a deposit of around £72,000 (in excess of double the average London salary) homeownership remains an unobtainable goal for many people. In common with other life goals, the internet provides options in the form of websites to find suitable friends to share a mortgage with. It is unclear how many people are prepared to take out a mortgage with a complete stranger and the legal implications of sharing may be daunting. Despite this, many signing up to shared mortgages do not automatically consider signing a Declaration of Trust to ensure that if anything happened to either one of them, their share of their property would be left to their family. The Declaration of Trust would set out how and when the parties approach selling the property and the method for one party buying the other out, including how the property should be valued, all legal fees paid and, crucially, how the sale proceeds should be divided.

As the market shows little sign of abating, some pundits are certain that shared mortgages will become increasingly common.

Economic outlook

Impact of the US interest rate increase

Increased interest rates in the US have already had an impact on swap rates available in the UK. Whilst the impact here has been negligible so far (some 0.0001%) it serves as a reminder that the two national economies are inextricably linked.

Whilst the market initially anticipated that increased rates in the US might expedite a similar move in the UK, commentators have suggested that the Bank of England's (BOE) indecision around the long anticipated rate increase may have more impact on the remortgage market than global economic developments.

Given the number of suggested dates for a rate increase, postponements and conflicting messages from the BOE, borrowers may have become numb to the message in a 'boy who cried wolf' scenario. Until the market takes the BOE's plans to increase rates seriously, there is unlikely to be a spike in remortgage activity as borrowers rush to lock themselves into favourable rates. The experts' tip is to monitor the swap rates, which are likely to increase if the market seriously anticipates change.

The current, low oil price (at its lowest since 2004) may act as a counterbalance to the US rate increase, restricting inflation and potentially pushing it back into deflationary territory. On this basis, the BOE may decide to stave off the anticipated increase until 2017.

Will £40 billion deficit require Bank of England intervention?

According to the Office for Budget Responsibility (OBR) UK families are on course to spend £40 billion more than they earn this financial year, fuelling fears that economic growth is precariously based on soaring levels of debt. This figure equates to approximately £1,500 of increased borrowing, per family, per year.

Whilst recovering from the economic crash in 2010 conservative financial behaviour led UK households to run at a surplus of £70 billion. The surplus has been eroded steadily as the economy has recovered, emerging as a deficit last financial year.

Former Business Secretary Sir Vince Cable has warned that, "We're back on the treadmill of growth being sustained by personal borrowing. Much of it is against an inflating housing stock."

Economic growth allowed the Chancellor to announce that he is scrapping plans to cut tax credits and police spending in his autumn statement. However, Labour has accused the government of underwriting its cost cutting with increased personal debt and called for a need to re-balance the economy by moving away from an overreliance on debt finance.

In addition, the OBR anticipates that the household debt-to-income ratio will increase to 163% by 2020-21, closing in on the levels observed at the time of the 2008 crash. This is combined with annual increases in average mortgage debt (up to £85,000) and unsecured borrowing (up to £8,000) per household.

The BOE has hinted that the long anticipated interest rate increase could prove a decisive measure in bringing personal borrowing under control to temper fears of overextended borrowing and a repeat of the 2008 crisis.

Buy-to-let: a risk to the economy?

The BOE has requested additional powers to regulate the buy-to-let mortgage market, following concerns that the sector represents a risk to the UK economy.

In summary, the BOE considers that this particular market causes concern on three fronts:

  • Credit risk to lenders if the market experiences widespread defaults, as mortgages represent UK banks' largest asset class. This risk will increase if economic growth again leads to a deterioration in underwriting criteria.
  • Amplifying the house price cycle. Buy-to-let borrowers generally enter the market when prices are rising and exit when they are falling. This herd mentality exacerbates movement in the market, expediting the highs and lows of the boom and bust cycle.
  • Increased debt as a result of the factors above.

In December, the government asked the sector to comment on proposals to hand further regulatory authority to the BOE's Financial Policy Committee, to manage this risk.

Whilst the proposals are likely to generate some useful discussion, at this stage the sector is generally opposed to state intervention in the buy-to-let market on the basis that it unnecessary and would be premature, before the impact of the recent tax changes are fully understood.

Lenders have called for a common sense balance to be struck between the need for regulation and the unintended consequences of restricting the buy-to-let sector, one of which would surely be to reduce the availability of already pressurised residential accommodation.


Rents to rise faster than house prices

The cost of renting is set to outpace the growth of house prices as demand continues to outstrip supply.

RICS research shows that rents could increase by an average of 5% for the next five years, narrowly out pacing the anticipated 4.7% annual increase in house prices. Increases to both rents and house prices look set to exceed household income. This trend continues to be dictated by the lack of housing stock.

RICS' economists cite the government's plans to restrict the buy-to-let sector (for the proposed benefit of the owner occupier market) as an exacerbating factor, as tenants who are not in a position to buy are ransomed by diminishing affordable housing stock.

With house building trailing demand, the situation is likely to get worse for tenants before it gets better. The extent to which increased investment in new build housing stock can temper increasing rents remains to be seen.

With the market starting to react to proposed regulation in the buy-to-let sector and no early solution to the housing shortage, 2016 may see a tumultuous year in the buy-to-let mortgage market.

New CML chairman

The CML has announced the appointment of Peter Hill, chief executive of the Leeds Building Society, as its chairman for 2016. Mr Hill is succeeding Moray McDonald of Royal Bank of Scotland.

The new Chairman has cited the Mortgage Credit Directive, the FCA's examination of competition and changes to the tax and regulatory frameworks applicable to the BTL sector as key challenges for the sector over the next 12 months, together with the emerging issues of lending into retirement and mortgage price transparency.

Mr Hill's appointment follows Leeds Building Society receiving the 'Innovation Award (Lenders)' at the Mortgage Finance Gazette Awards 2016 for the third consecutive year, as well as the award for 'Product Innovation (Lenders)'.

Young home ownership falls

The percentage of young people in the UK who own their own home is at its joint lowest level since 1996. 

Data revealed by the Labour Party found that just 44.9% of 20 to 30-year-olds are homeowners, based on figures that include shared ownership and are based on an analysis of Labour Force Survey figures. Ownership among those aged 30 and under reached its peak in 1999, when it stood at 62.7 %. These statistics come after a report earlier in 2015 indicated many young people were giving up on the idea of ever owning their own home. According to the report, Generation Rent by Halifax plc, the proportion of people aged between 20 and 45 saving for a deposit fell last year by 6%. Industry figures show that first-time buyers on average need to find a deposit of 18% to secure a mortgage.

Commentators have advised soaring house prices, high rents and lack of well paid job opportunities are preventing young people from entering the property market. Experts are predicting rising wages and growing numbers of people in work will boost the housing market in 2016. The Royal Institute of Chartered Surveyors expects property prices to increase by around 6% and rental prices to increase by 3%.

However the main concern is that construction of new homes will lag behind demand which will put pressure on house prices. This will reduce affordability for first time buyers. Experts have warned first time buyers could also find themselves competing with buy-to-let landlords in early 2016 as investors race to beat the April 2016 deadline for stamp duty increases.

Scotland - buy-to-let stamp duty to rise

Scotland has followed the UK government's lead and introduced a higher tax rate for second homes and buy-to-let properties.

SNP finance secretary John Swinney made the announcement as part of the Scottish government's pre-election budget. This means there will be a supplement of 3% of the total purchase price, payable in addition to the existing Land and Building Transaction Tax for anyone buying a second home or buy-to-let property worth more than £40,000.00 from 1 April 2016. 

In April 2015 Scotland moved from the UK's stamp duty land tax to its own system Land and Building Transaction Tax (LBTT). The LBTT system, which raised £218 million in its first seven months, uses a graduated rate. Currently under LBTT, properties purchased for up to £145,000.00 do not attract any tax. The Finance Secretary has confirmed the rates and thresholds for residential, non-residential and lease transactions will remain the same in 2016.

The Finance Secretary also confirmed legislation on the new surcharge on second homes in Scotland would be drafted to be in force by April 2016.

The Scottish government has advised the move was necessary to prevent market distortions. Scotland had been the only part of the UK to which a 3% stamp duty surcharge had not been introduced by Chancellor George Osborne in his autumn statement. It had been suggested Scotland could become an attractive place for Britons looking to avoid the extra stamp duty charge to buy property. 

The Scottish Fiscal Commission has indicated the supplement charge will affect between 8,500 and 12,500 transactions each year and could raise between £19 million and £27 million.

Northern Ireland - house price increase takes the lead

Northern Ireland has the fastest growing house prices in the UK. With an increase of 10.3% in a year, the local market has outpaced England, Scotland and Wales which rose by 7%.

Although encouraging for NI, the bigger picture puts this promising rise into context. NI is continuing to play catch-up on an unprecedented scale and the statistics must be considered carefully. Following the peak of the market in 2007, NI suffered the most dramatic downturn in UK history. Today, despite the reported rise, the average NI property remains the lowest in the UK at £158,000 as opposed to £286,000 across the UK as a whole. At the other end of the scale in London, the average property has topped half a million at £531,000.

Industry insiders predict that even a modest increase in NI house prices of 5% in 2016 would be a promising sign. Further, sustainable growth over the next ten years would result in an average NI house price of £190,000. However, pundits are growing concerned that rent increases on an unprecedented scale will become an obstacle for people in NI trying to climb onto the property ladder. 


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