Bank of England granted new powers to control buy-to-let

Photo: James Stringer

The Bank of England has been granted new powers to control buy-to-let lending in the UK.

From early 2017, the Bank of England’s Financial Policy Committee (FPC) will be able to direct regulation on lenders, ordering the Prudential Regulation Authority and Financial Conduct Authority to impose limits on both loan-to-value ratios and interest coverage ratios for landlords.

The decision follows the FPC recommending that it be given additional powers of direction over both the residential mortgage lending market and the buy-to-let mortgage market in September 2014. The former was granted last year, with buy-to-let proposals going under consultation earlier this year, before being given the official green light.

The consultation highlighted the positive impact of buy-to-let landlords in the economy, and the role they play in widening and balancing the overall housing market. They provide good quality accommodation for those who cannot at this point afford to buy a home, or who do not wish to commit to home ownership for personal or employment reasons.

However, the government has increasingly introduced measures against landlords and buy-to-let, despite its claims of supporting the sector. New affordability rules, which will come into force from September 2017, will require buy-to-let borrowers with four or more properties on their books to have their existing mortages and other costs taken into account before approving loans. From April 2017, meanwhile, mortgage interest tax relief will be incrementally cut, requiring landlords to pay tax on turnover rather than profit, forcing smaller landlords into higher tax brackets and causing many to hike rents to avoid making a loss. Some may even have to sell up altogether, reducing the size of the buy-to-let market at a time when rental supply is sorely needed.

“Expanding the number of tools at the Financial Policy Committee’s disposal will ensure that the buy-to-let sector can continue to make an important contribution to our economy, while allowing the regulator to address any potential risks to financial stability,” says Philip Hammond, Chancellor of the Exchequer.


Bank of England tightens buy-to-let lending regulations

3rd October 2016

The Bank of England has confirmed that it is tightening regulations on buy-to-let mortgages.

The Prudential Regulation Authority announced earlier this year that it was it was conducting a review of the buy-to-let market with an eye to raising all lenders up to a certain standard of underwriting. Now, it has confirmed that it will be tightening regulations surrounding lending to landlords.

“The PRA’s actions are intended to bring all lenders up to prevailing market standards and guard against any slipping of underwriting standards during a period in which firms’ growth plans could be challenged by the changing economic landscape and the impact of forthcoming tax changes,” explained the PRA in a statement.

The new measures state as minimum expectations tjat affordability assessments should take into account borrower’s costs, including tax liabilities, verified personal income nd possible future interest rate increases.

Lending to portfolio landlords (defined by the PRA as being those with four or more mortgaged buy-to-let properties) should be assessed using a specialist underwriting process. The PRA also clarified that the provision in Capital Requirements Regulation (CRR), which reduces the capital requirements on loans to small and medium-sized enterprises by around 25 per cent, should not be applied where the purpose of the borrowing is to support buy-to-let business.

Lenders will be required to street test landlords to make sure they can afford their mortgage interest payments under a minimum potential rate of 5.5 per cent for the first five years of the mortgage. This will not apply, however, to mortgages fixed for at least five years.

The new rules will begin to phased in from 1st January 2017, following a government consultation that asked for changes to be introduced gradually. Lenders, meanwhile, have already begun to introduce stricter lending processes in anticipation of the crackdown.

Peter Williams, executive director of IMLA, told Mortgage Introducer: “IMLA welcomes the decisions published today in the PRA’s expectations for buy-to-let underwriting standards, which are broadly in line with industry’s expectations. They offer a sensible way forward, setting sector wide baselines while at the same time allowing for firm discretion to be exercised.

“We are encouraged that the new standards are to be implemented in a sensibly phased way over the course of the next year. In the interests of a stable market for buy-to-let mortgages and housing overall, this 12 month window should now be allowed to unfold free from additional change and upheaval.”

“Some points of contention remain. There will be continuing concerns about the level playing field with firms outside of the PRA regime, though that is now clearly on the agenda of both the FCA and Bank of England,” he adds. “The use of a borrower minimum interest rate of 5.5 per cent will also remain a source of tension, not least if interest rates fall again.”

Bob Young, chief executive of Fleet Mortgages, added: “Lenders have already been moving in a number of areas since its initial publication and we can expect those who do not meet these standards to have to move further, and relatively quickly, in the case of interest cover ratio and stress test changes which need to be implemented by the start of next year – the market norm is likely to be circa-5.5% at 145%. The PRA have allowed five-year fixes to remain outside these standards but I suspect if there’s a spike in five-year activity, they’ll move to include it.”

Bank of England plans buy-to-let crackdown

30th March 2016

The Bank of England is planning to crack down on buy-to-let mortgages.

The Bank’s Financial Policy Committee warned this week that it is concerned some lenders may not be upholding high standards when underwriting buy-to-let mortgages, a concern that is amplified by the rapid growth of buy-to-let mortage lending.

The FPC “remains alert to potential threats to financial stability from rapid growth in buy-to-let mortgage lending”, the Bank announced in a statement, noting that the outstanding stock of buy-to-let mortgages has risen by 11.5 per cent in the year to 2015 Q4.

“The macroprudential risks centre on the possibility that buy-to-let investors could behave pro-cyclically, amplifying cycles in the housing market, as well as affecting the resilience of the banking system and its capacity to sustain lending to the wider real economy in a stress,” added the FPC.

The Committee acknowledged that growth of buy-to-let mortgage lending is likely to slow in Q2 2016 as changes to stamp duty take effect from April 2016, with the combination of forthcoming changes to mortgage interest tax relief likely to “dampen growth of buy-to-let mortgage lending relative to lenders’ plans”.

The Bank’s Prudential Regulation Authority has also launched a consultation paper on a supervisory statement which sets out proposals regarding its expectations of minimum standards that firms should meet when underwriting buy-to-let mortgage contracts.

The proposals “seek to ensure that firms conduct their buy-to-let business in a prudent manner” and “prevent a marked loosening in buy-to-let underwriting standards and to curtail inappropriate lending and the potential for excessive credit losses”.

The main proposals will involve considering the affordability of mortgages in the long-term for borrowers, running tests on borrowers to ensure they can withstand an interest rate rise to at least 5.5 per cent over five years, and restricting lending to portfolio landlords (those with at least four buy-to-let properties).

The announcement follows comments from UK Chancellor George Osborne last week that he was ready to give the FPC further scope to restrict lending.

“The Bank of England and the financial policy committee have identified potential systemic risks in the large increase in the buy-to-let market,” he is quoted as saying by The Guardan. “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.”