The Bank of England (BoE) is concerned that loans to landlords now pose a risk to financial stability should the financial system experience further shocks.
Buy to let lending has increased by 40% since the 2008 crash, whereas owner-occupier lending has increased by just 2%.
Buy-to-let mortgage lending means that the lending banks are “increasingly stretched” as landlords take on more debt to purchase ever more expensive properties, the Bank of England has said.
According to BoE statistics, buy-to-let mortgages are “twice as likely to turn bad” as owner-occupier loans. The Bank is warning that landlords could be a threat to lending banks and wider financial stability.
The rental sector is booming for two main reasons: (1) rising house prices make it harder for would-be first time buyers to get onto the property ladder, and (2) banks typically have tighter lending criteria on loans for owner-occupiers than they do for buy-to-let borrowers, which makes it easier for landlords to get a mortgage.
Bank officials on the Financial Policy Committee (FPC), chaired by Bank governor Mark Carney, are fearful that landlords would be vulnerable to a slowdown in the market. A drop in house prices, or a rise in interest rates, would put many buy-to-let lenders under severe pressure. This could in turn lead to large losses on the loans as borrows enter negative equity territory, or to a sharp downturn in house prices as buy-to-let landlords scramble to sell.
Minutes of the Financial Policy Committee’s last quarterly meeting say:
“Since 2010, rates of credit loss on buy-to-let loans in the United Kingdom have been around twice those incurred on lending to owner-occupiers,”
“Assessed against relevant affordability metrics, buy-to-let borrowers appeared more vulnerable to an unexpected rise in interest rates or a fall in income.”
There is strong evidence that buyers are piling into the UK’s housing market. Landlords and would be landlords are taking on greater levels of debt to benefit from rising house prices and low interest rates. This, the Bank thinks could pose a risk to financial stability.
“Increased competition among lenders in the buy-to-let sector had not to date led to a widespread deterioration in underwriting standards of UK banks. But some smaller lenders had loosened their lending policies, for example by raising their maximum loan-to-value thresholds,” says the FPC.
“The Committee noted that new loans to buy-to-let investors were often subject to less stringent affordability tests than loans to owner-occupiers.”
The FPC is now calling for powers to restrict buy-to-let lending in the same way it has with owner-occupier mortgages, placing restrictions on the maximum size of loans for a given income or a given house price. The Treasury is currently consulting on the idea of giving these powers to the Bank of England. “Ahead of these powers being finalised, the FPC stood ready to take action if necessary to protect and enhance financial stability, using its powers of recommendation,” say the latest minutes.
George Osborne has already laid down plans to hike taxes on buy-to-let lending and second home transactions, which are designed to cool down this market. He is also hiking stamp duty on second homes and investment properties in a bid to further clamp down on buy-to-let lending.
The FPC has said it is “closely following” the market to study the impact this policy will have on prices and transactions.
Buy-to-Let Lending Major Concern to the BoE – https://t.co/6frb46QMEP
— LandlordZONE (@LandlordZONE) December 15, 2015