NEWS BULLETIN
The Potential Effect of Proposed Mortgage Caps on
the Buy-to-Let Sector
The negative impact of
sub-prime mortgages in the USA on the world economy has had several fallout
consequences on UK mortgages, not the least of which is the Bank of England's
tacit proposal to limit the borrowing that homeowners can receive to finance
the purchase of property.
One suggested proposal is that
this be restricted to 75% of the purchase price, leaving the buyer to fund the
other 25%. The reason for this is patently obvious, in that in the event of a
default in payment the property has more potential to retain positive equity
than if the buyer had borrowed a larger amount. This then renders it more
likely for the mortgage to be recoverable in full in the event of a default.
This disables the negative
equity trigger that fired the financial crisis of 2007 and so is a rational
solution to preventing any future recurrence.
However, as is often the case, the solution to one problem generates
another.
Because fewer people,
particularly first-time buyers, will be able to afford the 25% deposit, the
demand for rented properties will increase. It could also be argued, however,
that reduced demand will result in reduced property prices, and the losers
would be the sellers - thus creating the very conditions the proposal was
intended to prevent.
Reduce home prices lead to
reduced equity. Perhaps even negative equity for those who just recently
purchased their homes! Not only that, but banks will also be less willing to
offer home loans unless they are cast-iron. In fact, this in itself has led to
reduced loans based on home values, and the building societies and banks have
voluntarily increased their required deposits to 10% or more this year for
those very reasons.
Buy-to-Let will become more
attractive for those that can afford the deposits as the demand for rented
accommodations increases.
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