The obvious way for the Financial Policy Committee (FPC) to restrict buy-to-let lending will be, one way or another, to require lenders to use a higher interest rate for the rental cover calculation.
Quite clearly the 5% used by most lenders is less than would be needed if one applied the same test as in the residential market, i.e. a 3% rise in Bank Rate. I think it is highly likely there will be action on this basis from the FPC, probably at its first quarterly meeting after the Chancellor hands over such powers.
The financial stability report refers to the April 2015 Trends in Lending publication, which said that the number of advertised buy-to-let mortgage products at 75% loan-to-value (LTV) and above had increased since mid-2013. As more lenders entered, or re-entered, the buy-to-let market in this period no doubt the number of mortgage products at LTVs below 75% increased as well.
More products means more choice but it doesn’t automatically follow that a higher proportion of lending was at 75% LTV or above. However, a requirement for lenders to apply a higher interest rate to the rental cover calculation would undoubtedly lead to many borrowers finding the maximum LTV available was reduced, particularly in low yielding areas like London and the South East.
As two thirds of buy-to-let properties are unencumbered the overall impact of such action on the buy-to-let market would be fairly limited, but as demand in the privsate rental sector sector is continuing to increase even a marginal reduction in the supply of properties could easily, over time, have a disproportionate impact on rent levels.
Some figures I suggest the FPC needs to look at more closely before coming to any conclusions on action is the very different split of purchase and remortgage business between the residential and buy-to-let markets. For example in 2014 71% of residential mortgages were for purchases, whereas only 46% of buy to let were.
Ignoring the “other lending” category, residential purchase lending was 60.8% of total residential and buy-to-let lending, whereas buy-to-let purchase lending was only 6.6%. With remortgages thrown into the mix, the figures look very different, with residential taking 24.8% of the total, and buy to let 7.7%.
Finally, I fully concur with the report’s conclusion that the impact of pension liberation on the BTL market will be small. The potential here has been massively over-hyped.
Ray Boulger is senior technical manager at John Charcol
