Chancellor George Osborne is warning the government may restrict buy to let borrowing with loan caps and rent cover limits.
As the Treasury announced tougher lending rules for residential borrowers in a new consultation, Osborne cautioned the same is on the way next year for buy to let investors.
The consultations will give the Bank of England’s financial policy committee new powers to put the brakes on mortgage lending.
The committee wants a toolkit to manage mortgage lending to stop property prices overheating and undermining bank and building society balance sheets with bad debt.
Osborne was told the committee sees buy to let as a threat to the country’s financial stability.
In 2013, says the Treasury report, buy to let borrowing comprised 12% of total mortgage lending and the trend is for the amount of borrowing to increase year-on-year. Levels are almost at the lending peak of 2007, when buy to let mortgages accounted for 15% of all borrowing.
“The financial planning committee wants powers of direction over loan-to-value limits and rent cover ratios for new buy to let mortgages and remortgages where the amount of borrowing increases,” says the consultation document.
As part of the consultation, the government wants to know whether a property investor’s rental income and existing buy to let mortgage debt should be considered when working out the affordability of new borrowing.
“Our preliminary view is this existing debt should not be considered,” says the report. “We also consider rental income is likely to be taken into account by prudent lenders as personal income when they have evidence that property business expenses have already been deducted from the amount.”
The Chancellor will give the committee the choice to slow down the buy to let mortgage market by limiting the amount banks and building societies can lend or by the number of loans or both together.
Further advances on existing loans will also be within the scope of the new rules.