HM Treasury and the Financial Policy Committee
HM Treasury has already sent ripples through the buy-to-let sector with two separate attacks on landlords. First came a slash in the amount of mortgage interest tax relief landlords are able to claim down to the basic rate of 20%, to be phased in from April 2017 over a four-year period. Just months later, the Chancellor took another swipe, introducing a 3% Stamp Duty premium payable on second homes which will come into effect on 1 April.
The Treasury is now gearing up to announce what powers, if any, it will grant to the Financial Policy Committee (FPC) over buy-to-let lending to “protect and enhance financial stability” in the sector, following a consultation it launched late last year. Should it receive these powers, the FPC will have the ability to dictate if limits should be placed on loan-to-value (LTV) ratios and interest coverage ratios in buy-to-let lending.
The FPC was set up by George Osborne in 2011 with the macroprudential responsibilities of protecting and enhancing the resilience of the UK financial system.
It’s still unknown whether the committee will in fact be handed these powers, but Osborne’s comment to MPs this month that the move was “highly likely” doesn’t look promising for the industry.
The consultation was closed to responses on 11 March 2016 and the Treasury said it plans to issue a statement later this year.
Basel Committee on Banking Supervision
Proposals on capital requirements for buy-to-let lenders also loom on the horizon from the Basel Committee, which sets financial standards on a global scale.
A consultation document published by the committee, which closed to responses in March, proposes that lenders should hold more capital in reserve for buy-to-let borrowing, with these loans being deemed riskier than deals for homeowners.
Stakeholders have not held back on criticising the proposals, with even PRA chief executive Andrew Bailey wading in on the debate to assure lenders that the plans are not yet ‘a done deal’.
This may appear another unjustified stab at buy-to-let investors, but as an organisation tasked with improving the quality of banking supervision worldwide, it’s unclear whether the Basel Committee will take into account the raft of recent changes to the UK’s buy-to-let sector, and their impending effect on activity.
The industry is currently awaiting for confirmation from the committee on the steps it plans to take next.
Prudential Regulation Authority
The most recent buy-to-let clampdown came from the Bank of England’s regulatory arm, the Prudential Regulation Authority (PRA).
In comparison to the FPC, the PRA is responsible for microprudential policy and is tasked with promoting the security of lenders while enabling effective market competition for PRA-authorised firms.
Its most recent consultation paper, Underwriting standards for buy-to-let mortgage contracts, the PRA sets out intentions to reduce the risk of large losses suffered by lenders in the case of an economic downturn that could threaten their stability.
The paper lays out its expectations for affordability testing across the wider buy-to-let market, proposing that firms use an interest coverage ratio test and/or income affordability test when assessing buy-to-let applicants. It also suggests that landlords with four or more properties, known as portfolio landlords, are subject to specialist underwriting by lenders.
The PRA has already starting speaking with lenders about their proposals and has requested that all responses are submitted by 29 June. Lenders will have around a month to implement the guidelines after the consultation closes if there are no major amendments to be made to the proposals.