The Bank of England’s Prudential Regulation Authority is telling lenders to exercise more scrutiny on loans for buy to let properties.

In a letter to lender chief executives the Bank of England’s executive director – David Bailey – warns that the market should prepare itself for “a prolonged period of credit stress.”

He says: The operating environment for firms remains challenging. The impact of increasing interest rates, inflation and high cost of living, geo-political uncertainty, and supply-chain disruptions is expected to pose challenges to firms’ credit portfolios.”

The enhanced scrutiny should also be applied to loans to small businesses, mortgages for commercial properties, and unsecured personal loans, which the Bank’s PRA believes may also be vulnerable during the current cost of living crisis.

Specifically the letter says: “The impact of increasing interest rates, inflation and high cost of living, geo-political uncertainty, and supply chain disruptions is expected to pose challenges to firms’ credit portfolios. Firms need to be ready for a prolonged period of stress. 

“In recent years, including through events like the Covid-19 pandemic, firms have tightened underwriting standards, enhanced forbearance tools, and increased operational preparedness for collections. However, these enhancements are untested under the current combination of risk factors. 

“Therefore, it is important that firms ensure their credit risk management practices are robust, portfolios are closely monitored, customer support and collections arrangements are appropriately scaled, and expected credit loss provisions are recognised in a timely manner.” 

According to the most recent data from UK Finance – the lenders’ trade body – the total value of buy to let mortgages taken out in 2019 (the last normal year before the pandemic) was £39.5 billion, £10.2 billion of which was attributed to the purchase of new properties and £29.3 billion for remortgages. 

A separate analysis by lettings agency Hamptons says that in the first quarter of 2022, some £8.5 billion worth of buy to let properties were bought by landlords, mostly with mortgages. The majority of deposits from landlord buyers are around 25 per cent according to UK Finance.