The Bank of England has revealed its tougher borrowing standards to prevent buy-to-let lending overheating the wider housing market.
The Bank’s financial policy committee (FPC) views buy-to-let lending as one of the biggest domestic risks to the financial system, although the possible exit from the European Union was cited as the biggest short-term risk.
The Bank’s Prudential Regulation Authority (PRA) reported that mortgage firms expected to grow buy-to-let lending books substantially over the next few years – despite recent tax measures such as the 3% stamp duty surcharge and phased reduction in mortgage interest tax relief.
The authority says action is required “to ensure underwriting standards did not slip” and BTL lending go out of control. The PRA claims that without further constraints, lenders expect a gross increase of 20% in buy-to-let borrowing over the next two to three years.
It set out four measures designed to tighten buy-to-let lending standards:
- Lenders should consider the borrower’s costs associated with letting the property, including tax costs.
- A borrower’s personal income should be verified if the lender wants to include it to support the mortgage.
- Lenders should include future interest rate increases in affordability assessments. This includes a worst case scenario of interest rates rising to 5.5% for a full five years.
- There should be a special underwriting process for “portfolio landlords” with four or more properties.
The authority says these measures should ultimately reduce buy-to-let approvals by between 10 and 20% by 2019.
Some three quarters of buy-to-let lenders already meet its new standards, the authority says, but five of the 20 biggest lenders currently use a ‘stressed interest rate’ of 5.47% or lower – so below the new level set by the authority.
The changes are expected to be fully implemented this summer.
The authority says it has looked at the major 31 lenders in the industry, which represent 90% of buy-to-let lending in the UK.
Jeremy Leaf, a former RICS chairman and north London estate agent, says: “This is a classic case of slamming the stable door after the horse has bolted. 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. Landlords will already be put off investing further unless the numbers add up and this is a case of kicking them when they are down.
“The Bank of England should have waited to see what impact the changes that have already been made have on the market before making further tweaks. The combined impact of all these measures will be to cut supply and increase the upward pressure on rents. A number of landlords will already have been tempted to sell before this latest round of proposed changes to the sector.”