Bank of England closely monitoring UK buy to let lending

The Bank of England has confirmed that it is closely monitoring the buy to let sector in the UK following changes announced in the sector in the autumn statement.

Its latest Financial Stability Report says that the buy to let sector continues to drive growth in the UK mortgage market and the Bank of England believes it is more interest rate sensitive than the owner occupied sector and warns that strong growth may have implications for financial stability.

It means that more buy to let lending controls may therefore be on the cards. That would be another blow to the sector. Landlord wishing to enter the sector and those looking to expand their portfolios already face paying an extra 3% in stamp duty from next April and there have also been changes to tax on earnings.

The Financial Stability Report says that since 2010, credit loss rates incurred on buy to let loans in the UK have been around twice those incurred on lending to owner occupiers. It points out that the buy to let sector continues to drive growth in the mortgage market and while greater competition in this sector has not to date led to a widespread deterioration in underwriting standards of UK banks, strong growth in buy to let lending may have implications for financial stability.
‘The FPC remains alert to financial stability risks arising from rapid growth in buy to let mortgage lending and notes the difference in underwriting standards in the owner occupier and buy to let mortgage markets, in particular in the typical interest rates used in affordability stress tests,’ it says.

‘New loans to buy to let investors are often subject to less stringent affordability tests than loans to owner occupiers. According to industry standards, the affordability of a buy to let loan is typically tested by ensuring that the rental income exceeds 125% of loan interest payments at a mortgage interest rate of 5% to 6%. In contrast, and in accordance with the FPC’s June 2014 Recommendation, the affordability of loans to owner occupiers is tested by ensuring that the borrower has sufficient income to cover their mortgage payments at a more stringent mortgage interest rate of around 7%, despite owner occupier mortgage rates tending to be around 0.7% lower,’ the report continues.

‘Assessed against these affordability metrics, buy to let borrowers may be more vulnerable than owner occupiers to an unexpected rise in interest rates or a fall in income. For example, if mortgage rates rose by 300 basis points, the increment by which the FPC recommended the affordability of mortgages to owner occupiers is tested, nearly 60% of buy to let borrowers who took out loans recently would see their rental income no longer covering 125% of their interest payments. By comparison, only 4% of recent owner occupier borrowers would see their mortgage debt costs rise to above 40% of income, a level above which households are more likely to experience payment difficulties,’ it adds.

Steve Bolton, founder of Platinum Property Partners, believes that the Government seems intent on destroying the buy to let market in the hope that this will solve the housing crisis. ‘However, it has been the severe lack of home building over the last decade that has got us into this situation in the first place. Trying to address this problem by attacking private landlords seems short sighted and another tax grab strategy,’ he said.
He explained that it is estimated that the 3% stamp duty rise for landlords and second home owners will raise an additional £1 billion for the Treasury. ‘But if this is based on the current size or growth projections of the buy to let market then this calculation is seriously flawed. The market is likely to substantially contract given both this and the changes to mortgage tax relief announced in the Budget, so the amount raised will reduce accordingly,’ he pointed out.

He also explained that the sector most likely to be affected by the changes are Mum and Dad landlords who invest in or inherited property, often to provide a nest egg or eventually housing stock for their children. ‘This effectively punishes those who have worked hard to provide for their families, and parents hoping to use buy to let to help their children get a foot on the property ladder could well be prevented from doing so,’ said Bolton.
‘It is expected that there will be a significant decrease in new entrants into the buy to let market from those investors who do not have the knowledge or experience to establish a robust business plan. Many amateur landlords may also be forced to sell,’ he commented.

He thinks that it may be that the Government intends for institutional investors to fill the amateur landlord gap but this could take some time and it is not clear if they will provide the additional income to the Government in the same way as the private buy to let sector.

‘Limited supply of rental property and additional costs for landlords, including the reduction in mortgage tax relief, could increase rents in the short term and make it even harder for tenants to save for a deposit in the future,’ he added.
‘In addition, more housing stock will become available and potentially reduce house prices in the long term, which could be a positive for many investors, but not to a point where the housing crisis will be solved. It is the lack of housing stock for buyers that is impacting affordability and the Government’s attempt to destroy the private buy to let market does not present a cure,’ he concluded.