This follows Bank of England governor Mark Carney’s bid to govern the interest coverage ratio in buy-to-let rental calculations to future-proof landlords from market or interest rate hazards.
In his Financial Stability Report, Carney said if mortgage interest rates increased by 300 basis points, the amount residential mortgage lenders stress owner-occupier’s affordability, nearly 60% of buy-to-let borrowers would see rents fall below 125% of interest payments.
In September 2014, the Financial Policy Committee (FPC) recommended that it be given additional powers of direction over both the residential mortgage lending market and the buy-to-let mortgage market.
These powers would form part of FPC’s macroprudential toolkit – the tools it has at its disposal to head off potential threats to financial stability should they arise.
The government granted the FPC powers over the residential mortgage lending market in April 2015 and promised to consult on buy-to-let powers by the end of this year. This consultation, which includes draft legislation and a full impact assessment fulfils that commitment.
The FPC recommended that it be granted the power, if necessary to protect and enhance financial stability, to direct the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) to require regulated lenders to place limits on buy-to-let mortgage lending by reference to:
• loan-to-value (LTV) ratios
• interest coverage ratios (ICRs)
Chancellor of the Exchequer, George Osborne, said: “Ensuring that Britain’s financial services sector is resilient enough to withstand future shocks is a key part of the government’s economic plan.
“That is why the government has radically reformed Britain’s supervisory landscape, putting the Bank of England back at its heart. And it is why we created the Financial Policy Committee with a clear remit to identify and address potential financial stability risks.”
CML director general Paul Smee said: “We understand the rationale for putting the macroprudential tools at the Bank of England’s disposal, but also recognise that this does not necessarily mean they will be used. In our view, buy-to-let does not constitute a market that currently requires further macroprudential intervention, especially as the effect of several recent tax changes is yet to be fully felt and evaluated. We urge policymakers to be mindful of the risk of unintended consequences that could adversely affect the private rented sector, alongside their focus on ensuring that the buy-to-let market does not pose a threat to financial stability.”