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Labour proposes tightening mortgage lending and end to the ‘buy-to-let frenzy’

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05/06/2019
The Labour Party has published a proposal for housing and land reform which recommends far tighter controls on mortgage lending and greater intervention from the Bank of England.

Regulatory moves would come alongside the overhaul of laws and taxation to create greater transparency and land price stability, according to the Land for the many report.

One of the key themes introduced is to end the “buy-to-let frenzy”, with a range of measures proposed including tighter restrictions all mortgage lending but particularly the buy-to-let market.

“Major reforms of the private rented sector” would mean landlords face a series of significant changes including inflation-linked rent rise caps, open-ended tenancies, and tougher eviction clauses.

Bank of England risk rules

To limit mortgage lending supply, the authors argue the Bank of England should intervene to disincentivise mortgage lending and encourage lenders to support other “more strategically useful” areas of the economy.

“Banks currently have a strong incentive to lend against housing collateral, since capital requirements for mortgage loans are lower than for other types of lending, including loans to small business, collateralised by commercial property,” the report said.

“This bias could be reversed by, for example, raising the risk-weightings for mortgage lending, and lowering the risk weightings for productive forms of lending, or by enforcing a maximum ratio of mortgage lending to productive lending.”

While reducing the house-price-to-income ratio is expected to widen access to housing, the authors acknowledge that additional measures may be needed to prevent the tightening of mortgage access disproportionately impacting poorer households.

Further tighten BTL mortgages

“Once house prices are stabilised, and the house-price-to-income ratio starts to fall, we recommend that the maximum loan-to-income and loan-to-value ratios should be correspondingly tightened, to prevent any future debt-fuelled reinflation of house prices,” the report continued.

“If, in spite of the improvements to tenants’ rights and property tax outlined, first-time buyers continue to be outbid by prospective landlords, Labour should more heavily regulate or reduce the availability of buy-to-let mortgages, by requiring that borrowers would need to show their existing income was sufficient to cover monthly mortgage costs.

“Arguably, it is unfair for first-time buyers to have to compete against purchasers able to rely on projected rental income.

“Regulating or reducing buy-to-let mortgages would dampen speculation-driven house price increases,” it added.

Tax overhaul

The 70-page document proposes a significant range of tax changes, including a progressive property tax to replace council tax to discourage the use of homes as financial assets.

This would be payable by owners, not tenants, with valuations for tax purposes updated annually, and empty homes and second homes automatically taxed at a higher rate.

A surcharge for all properties owned by those who are not resident in the UK for tax purposes was also proposed with stamp duty phased out for those buying homes to live in, and capital gains tax for second homes and investment properties increased.

An offshore company property tax payable by companies based, or beneficially owned, in secrecy jurisdictions would increase transparency and “ensure that land is not used for financial speculation, tax avoidance or money laundering.”

Meanwhile the report also recommended an increase in the Annual Enveloped Property Tax and the removal of the exemption for properties under £500,000.

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