The Bank of England is demanding more control so that they can dictate or "guide" lenders in the numbers of buy-to-let mortgages and the amount that can be borrowed by would be investors. A leading estate and letting agent is warning landlords who are thinking about investment in London and the South East, that they may be forced to stump up 40% deposits to get finance.

If the Bank of England gets its wish, then the Financial Policy Committee will tell lenders that they must "stress test" new landlords to decide how much is equitable to lend them. The criteria is that landlords must prove the income that can be generated from renting the prospective property, will be higher than their intended interest payments on their mortgages.

It has always been the case that buy-to-let mortgages have been given so long as the rental  income for the landlord covers 125% of the interest component of the mortgage, the model delivers a good degree of security for landlords should the interest rates rise.

The present arrangement is solely at the discretion of the lender and since 2011 the rate on average has been at 5%. This equates to 1.2% above the 3.8% rate at which the average landlord secures their loan.

Overall in 2014 those landlords that purchased properties can expect the rental income to be 205%  of the mortgage interest which is well above the standard 125% requirement. Lenders when carrying out the standard "stress test" for affordability is that the rental income must be 165% of the mortgage interest

The MMR (Mortgage Market Review) from its findings reports that new owner occupiers are able to cope with higher repayments with interest rates of 7%. The Bank of England has not yet received its powers to instigate new levels of "stress testing", however if it is granted it could mean that landlords may have to pay higher deposits to receive the mortgage finance. The estate and letting agents forecasts that on an average an extra £40,000 may be needed to be found by new investors.

Nick Dunning, group commercial director of the firm had this to say about the Bank of England's plans:  “Stress testing of new loans for investors has the potential to increase the entry barriers for would-be landlords. It will primarily affect areas in the South of the country and areas where yields are lower. If the proposals are implemented, would-be landlords will have to put down increasingly larger deposits to meet more stringent lending criteria.

“The high value nature of parts of London and the South East mean many landlords will find themselves having to put down deposits upwards of 40%. While lenders need to ensure repayments are affordable to the borrower, they must ensure they strike a balance between affordability and viability.”