Bank of England poised to act on buy-to-let

The Bank of England has said that if the buy-to-let sector threatens Britain’s financial stability it “stands ready to take action if necessary”.

The Bank has announced the results of its annual stress tests of the seven biggest lenders. 

Barclays, Lloyds Banking Group, Santander UK, Nationwide and HSBC all passed the stress tests and were judged to have adequate capital positions.

But Royal Bank of Scotland and Standard Chartered were found to be the weakest of the seven banks and were both flagged for capital inadequacies.

Experts widely believed that the Bank of England’s Financial Policy Committee (FPC) could unveil measures to curb the buy-to-let market as part of a clampdown on risky lending.

The Bank said it would monitor developments in buy-to-let activity but did not announce any new measures to curb mortgage approvals.

“The FPC remains alert to financial stability risks arising from rapid growth in buy-to-let lending and will monitor developments in buy-to-let activity closely following the tax changes to the buy-to-let market announced by the Chancellor in the Budget and Autumn Statement,” said a statement from the Bank.

The Bank noted that buy-to-let investors were subject to less stringent affordability tests than loans to owner-occupiers and potentially more vulnerable to an unexpected rise in interest rates or a fall in income.

Earlier this week Barclays announced that it is increasing its rental cover ratio from 125 to 135% to protect landlords from affordability shocks.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said other lenders are likely to follow Barclays’ lead.

“We are getting to the stage where buy-to-let is going to become a 50% loan-to-value (LTV) product in the south-east and London at least, taking the buy-to-let investor into the same space as a seasoned landlord. 

“This means that if you are going to invest in property you won’t be leveraged at 85% LTV, for example, which was commonplace during the boom, but will need to find a lot more equity. This, combined with increased entry costs from April in the form of higher stamp duty for landlords, will increasingly exclude the small-time investor with a property or two in favour of larger investors with much deeper pockets.

“Higher-yielding properties, which will support lending at 75% LTV, can be found in the north so those who believe in the future of the Northern Powerhouse may be tempted to turn their attentions elsewhere. There will be very few properties which can produce this level of yield in the south.

“The result is likely to be fewer new investors coming into the market. If you are already invested then that is a different matter, and we don’t expect landlords to sell up en masse because the majority take a long-term view and invest for capital growth as well as income. Someone buying for 20 years will find the higher entry costs are absorbed over a period of time so it is less of an issue.

“These developments are not good news for tenants as landlords will inevitably push up rents if they can to cover some of their higher costs and removal of some tax breaks.”

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