Bank of England Report to Limit Buy-to-Let


March 2016

Bank of England Report to Limit Buy-to-Let

In the build up to their latest report, the Bank of England appears to be ready to cut down on the number of buy to let mortgages.

The buy to let market has been under observance for a while, with many people worried about the amount of capital that it has pumped into the housing market and how vulnerable the mortgages are to a rates rise.

The Prudential Regulation Authority, Threadneedle’s regulatory arm, will release a report on Tuesday that will examine underwriting standards for buy to let mortgage providers. The report will also outline a variety of scenarios designed to test the financial strengths of banks in the UK.

It is understood that the mortgage providers have lowered lending standards for landlords, which has the potential to leave the UK open to another property crash. Some suggested measures to rein this in are options such as limiting the percentage of buy-to-let mortgages for each lender, tightening the standards required to take out a mortgage, or compelling providers to use a higher level of capital for the mortgages.

Recent times have seen the buy to let mortgage market jump back into popularity due to all-time-low levels of interest being offered. This means that borrowing has been much less expensive and saving money with a bank has become less appealing.

The new rate of stamp duty on second homes, introduced by George Osborne, has meant that many investors have scrambled to make their purchases before the 2nd of April deadline. This measure was designed to cool the market somewhat but has actually led to a short term jump in house prices. The chancellor has said that he is willing to give the Bank’s financial policy committee the power to restrict buy-to-let lending even further.

Speaking to the Treasury committee, George Osborne said:

“The Bank of England and the financial policy committee have identified potential systemic risks in the large increase in the buy-to-let market ... 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.”

The stamp duty increase has led to total mortgage lending being 20% higher this February than it was at the same time last year. One business leader, writing anonymously in the Guardian newspaper, believes that “it is not hard to see why” when you look at the April deadline.

“Higher stamp duty on buy-to-let properties and second homes comes into force at the start of April, creating an incentive for potential purchasers to evade the clutches of the taxman. The surge in activity is giving an added upward twist to house prices, which are rising by around 10% a year – five times faster than average earnings.”

They go on to say that buy-to-let lending, by its very nature, has the tendency to exacerbate the risk of a property market bubble because of the times at which it encourages people to invest.

“The terms of buy-to-let mortgages tend to be less onerous than they are for owner-occupiers, and this tends to accentuate the boom-bust cycle. Why? Because it encourages buy to let when the property market is hot, but means the buy-to-let sector is more sensitive to rising interest rates. The Bank is keen to avoid a downturn in the housing market being amplified by buy-to-let landlords selling up en masse because their investments have gone sour.”