The Bank of England has today revealed plans to clamp down on the buy-to-let market, setting out strict new rules for banks underwriting buy-to-let mortgage contracts.
In a new paper out today, the Prudential Regulation Authority (PRA) said lenders will need to meet a minimum set of requirements before underwriting buy-to-let mortgage contracts, including assessing the borrower’s ability to cover costs associated with letting out their property, such as tax liabilities. The PRA also said lenders will need to consider borrowers’ non-rental incomes, as well as whether they would be able to cope with future interest rate rises to levels as high as 5.5 per cent.
So-called portfolio landlords – people with four or more mortgaged buy-to-let properties – will also face extra scrutiny under the new rules.
The Bank said it expects the changes to underwriting standards will reduce banks’ anticipated gross buy-to-let mortgage lending by 10 to 20 per cent over the next two to three years. Buy-to-let lenders are currently expecting to increase gross buy-to-let mortgage lending by just over 20 per cent, on average, each year, according to the Bank.
The FPC said in today’s statement that it “remains alert to potential threats to financial stability from rapid growth in buy-to-let mortgage lending”, noting that the outstanding stock of buy-to-let mortgages rose by 11.5 per cent in 2015 alone.
The Bank has repeatedly warned that the buy-to-let sector poses a significant risk to the UK economy, and earlier this month, Sir Jon Cunliffe, deputy governor of the Bank of England for financial stability, said there was a risk that if large numbers of buy-to-let landlords were to sell their properties at the same time, there could be a “spiral of house price declines” across the wider housing market.
The FPC asked the Treasury for new powers to restrict the buy-to-let sector last year, and chancellor George Osborne told MPs last week that it is “highly likely” that he will give the FPC further responsibilities later this year given the “knowledge that the Bank of England has concerns about a bubble emerging in this market”.
"The measures I have taken in the last couple of fiscal events – on additional stamp duty, on changes to mortgage interest relief – have been done in the knowledge the Bank of England has concerns about a bubble emerging in this market,” Osborne told members of the Treasury Select Committee on Thursday, pointing to a new three per cent stamp duty surcharge on buy-to-let properties and second homes that is set to go into effect at the end of this week.
"It is highly likely we will give the FPC powers over the buy-to-let market. It is possible we can do that later this year.”
Former Royal Institute of Chartered Surveyors (RICS) chair Jeremy Leaf accused the PRA of “slamming the stable door after the horse has bolted” today, saying, “The changes the chancellor has made to mortgage interest tax relief and higher stamp duty for landlords will have enough of an impact on buy to let without the need for further interference from the Bank of England.”
But Investec’s Ian Gordon told City A.M. there has been a “sigh of relief at the largely sensible and pragmatic approach” by the Bank to raise the underwriting standards of a minority of banks, noting that publicly-traded specialist lenders Aldermore, OneSavingsBank, Shawbrook and Virgin Money already comply with the new rules.
The Bank published the PRA paper this morning alongside the latest statement from its Financial Policy Committee (FPC) arm, which regularly assesses the domestic and global risks to Britain’s financial stability. The FPC said today that the referendum on Britain’s European Union membership poses the most significant short-term risk to the financial stability of the UK.