The Bank of England could today respond to concerns about a frothy housing market by announcing new lending restrictions on landlords and those taking out buy-to-let mortgages.
This morning the Prudential Regulation Authority (PRA), the Bank’s supervisory arm, will publish the results of a four-month long investigation into underwriting standards – the terms and conditions lenders attach to buy-to-let mortgages. It is set to announce plans for restrictions on both new borrowers and how much banks can dish out to those buying rental property.
Policymakers are concerned the expansion of the buy-to-let market, which has grown nearly six per cent a year since 2008, “may have implications for financial stability”.
Because lending rules are generally looser for buy-to-let mortgages than those buying their own home, landlords “may be more vulnerable to an unexpected rise in interest rates or a fall in income, which could exacerbate the scale of a fall in house prices”.
Following last year’s changes to stamp duty, including a new three per cent surcharge for those buying second homes, which will come into effect on Friday, here’s what else landlords should be looking out for today:
The PRA will probably ask George Osborne and the Treasury to let it impose restrictions on the maximum size of mortgages banks and building societies are allowed to offer buy-to-let borrowers, in the shape of a loan-to-value (LTV) cap. In its stress-testing, the Bank assumed most buy-to-let mortgages were taken out at an LTV of around 60 per cent, though some lenders do offer loans of up to 90 per cent.
Landlords could also face tougher assessments of their own finances before being granted a buy-to-let mortgage. The Bank estimates that if mortgage rates increased by three percentage points, rental income would no longer cover 125 per cent of interest payments – a key metric the used to assess stability – for over half of landlords that have taken out a loan recently. Expect new rules on how much banks can lend not only as a proportion of a property’s value, but also of the landlord’s income.
Overall lending limits
Lenders could also face restrictions on the total amount of buy-to-let mortgages they are allowed to hold on their balance sheets. Since the financial crisis, loans to landlords have grown at a rate of nearly six per cent a year, compared to an expansion of just 0.3 per cent for those buying their own homes.
The PRA may want to make sure lenders do not become too exposed to the rental market, given that it believes landlords are more likely to face financial distress and sell their properties than owner-occupiers in the event of economic instability.