The Financial Policy Committee (FPC) presented its Financial Stability Report this morning outlining its well-voiced concerns over the risks which continued growth in the buy-to-let market could cause to economic stability.
He laid out the powers which he wants the Treasury to grant the FPC which included the ability to control the buy-to-let interest coverage ratio, commonly set at 125%.
His reasoning for doing this is to protect landlords from rises in interest rates or falls in income. Carney said that a 300 basis point rise in rates would prevent 60% of landlords from being able to cover rental payments by 125%.
Barclays pre-empted Carney’s announcment yesterday by increasing its coverage calculation to 135%.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said Barclays’ decision was likely to be the first of many.
He added: “We are getting to the stage where buy-to-let is going to become a 50% loan-to-value (LTV) product in the South East and London at least, taking the buy-to-let investor into the same space as a seasoned landlord.”
Harris said landlords would now not only need to find a larger deposit to purchase buy-to-let properties to get the mortgage low enough to meet the rental calculation but were also faced with the extra pressures of higher Stamp Duty.
“This…will increasingly exclude the small-time investor with a property or two in favour of larger investors with much deeper pockets,” he said.
Mortgage brokers shared the view that certain measures to stop the buy-to-let market overheating were welcome but cautioned over using measures which could a have far-reaching negative impact.
Dominik Lipnicki, director, Your Mortgage Decisions, said: “There is a strong argument that buy-to-let mortgages should indeed be treated just like any residential mortgages. I would support this view for amateur buy-to-let investors who deserve more protection, this would however be overkill for buy-to-let professionals.
“We must be very wary of blunt instruments which are designed to protect the borrower or the housing market as a whole as they may well have consequences such as mortgage prisoners or even higher rents for people unable to get on the housing ladder.”
Coreco director Andrew Montlake said he could understand why the FPC would want to control the buy-to-let ratio to smooth out the potential peaks and troughs of the housing market but it needed to be careful to avoid a heavy handed approach.
“Any use of such powers need to be carefully thought through in order to ensure that they do not become the cause of further issues rather than the solution,” he said.
Director of London Money Martin Stewart welcomed Carney’s request to have more control over the buy-to-let market which he said was another move to wrestle back control of the housing market from the clutches of the ‘buy-to-let army’.
He said following the tax announcements in the Summer and Autumn Budgets and the FPC’s interest in limiting lending it would force people to take a closer look at property as an investment vehicle
But Stewart urged regulators and policy makers to exercise a degree of caution. “Too many changes in too short a time can kill the golden goose when really all we need to be doing is clipping its wings in order to protect the borrower, the tenant, the lender and ultimately the tax payer,” he said.
Harris said if more lenders follow Barclays’ lead and increase the interest rate coverage investors may be tempted to turn their attentions to the north.
“Higher-yielding properties which will support lending at 75% LTV can be found in the north so those who believe in the future of the ‘northern powerhouse’ may be tempted to turn their attentions elsewhere. There will be very few properties which can produce this level of yield in the south.”
He added: “These developments are not good news for tenants as landlords will inevitably push up rents if they can to cover some of their higher costs and removal of some tax breaks.”
Todays BoE stablility report made some interesting reading “Housing market activity is picking up from low levels, with mortgage lending driven by the buy-to-let sector” and “The buy to let share of new lending by lenders outside the largest six UK banks has risen from 27% to 42%.” and “The total flow of buy-to-let lending in 2015will be close to its pre-crisis peak”.
My favorite has to be “Greater competition in this sector has not to date led to a widespread deterioration in underwriting standards of UK banks.”
So despite BTL driving the mortgage market, its giving opportunities to small banks and despite it not yet at per-crises levels and responsible lending policies – there needs to be tighter controls?
The BoE is planning to introduce controls in order to make risk decisions on commercial lending. A clear path to an further unproductive UK economy is central government quango deciding lending polices of small banks to small business.
Dominik Lipnicki from Your Mortgage Decisions has clearly left his common sense at home when he came to work this morning if he is to believe their is any case for a business finance to be “treated just like any residential mortgages”. Assessing a commercial loan based not on the business income but the owners personal income is ludicrous.
Martin Stewart should realise the BTL “golden goose” has already been cooked thank goodness. Also if small residential investors cannot take the hints from the Chancellor & the Bank of England that it is time to exit this sector with good profits then they will find a stampede of small investors trying to exit in a couple of years time with prices falling rapidly.
This is all good news for the younger generation who wish to purchase. The “baby boomers” which I am one and who have been the main beneficiaries of the BTL sector will probably be better off reinvesting their capital elsewhere as quickly as possible.
Please note that the contributor below appears to have an obsession re the BTL marketplace and has been ranting about it for some considerable time both here and on other social media and frankly shouldn’t be contributing to a site that is for the use of Mortgage Intermediaries. He is an IFA not a mortgage broker and possibly doesn’t like people investing in real assets when they could be buying pensions and pooled investments through him, but I believe that his motivations may be deeper than that.
He has also made consistent rants on Twitter about the same subject which show racist leanings about immigration, as he seems to feel that stopping tax relief for BTL thereby reducing availability would reduce the level of immigration, when in fact it would just potentially reduce the level of availability and just push up rents because of demand, plus landlords covering their costs.
I certainly wouldn’t want to take advice from him.