BOE Says Lenders Should Tighten Buy-to-Let Lending Standards

  • Lending assessment will include minimum rate of 5.5%
  • Stability officials continue to monitor market closely

The Bank of England recommended tighter lending criteria for buy-to-let mortgages and said it continues to look for signs that risks are accelerating.

The Prudential Regulation Authority -- the U.K.’s main banking supervisor and part of the central bank -- published guidelines on Tuesday that aim to guard against a loosening of underwriting standards and bring all lenders into line on affordability of buy-to-let loans. The assessment should include a minimum stressed interest rate of 5.5 percent and will curb growth of the 200 billion-pound ($285 billion) market, the BOE said.

“Some lenders are currently applying less rigorous underwriting standards than the market norm,” the PRA said. Banks should “take into account the borrower’s costs associated with letting the property, including tax liabilities.”

The move is part of a wider clamp down on property investment, which BOE officials have warned represents a growing threat to financial stability. With the U.K. benchmark interest rate at a record low 0.5 percent for more than seven years, the central bank’s Financial Policy Committee is on the front line of the response to housing-market risks. Landlords borrowed 3.7 billion pounds in January, a 42 percent increase from a year earlier, according to data compiled by the Council of Mortgage Lenders.

Stability Threats

The PRA consultation on underwriting standards -- which closes on June 29 -- was published in London alongside a statement from the 10-member FPC, which held its quarterly meeting last week.

“The FPC remains alert to potential threats to financial stability from rapid growth in buy-to-let mortgage lending,” according to the statement. “Investors could behave pro-cyclically, amplifying cycles in the housing market, as well as affecting the resilience of the banking system.”

The PRA’s recommendations include an affordability assessment, a requirement for lenders to verify borrowers’ personal income, the minimum interest rate -- which will apply during the first five years of the buy-to-let contract -- and a specialist underwriting process for landlords with more than four properties.

Banks plan to expand buy-to-let lending by 20 percent per year in the next two years, the BOE said. The PRA’s proposed underwriting standards would probably reduce this figure by 10 percent to 20 percent over three years, it said. Three-quarters of lenders already impose criteria which are strong enough and this will bring up those with weaker standards, the BOE said.

Specialist buy-to-let mortgage providers fell in London trading. Aldermore Group Plc’s stock declined 3.2 percent to the lowest in two weeks, and Shawbrook Group Plc declined as much as 1.3 percent. That compares with a 0.3 percent fall for the FTSE 350 Bank Index.

New Powers

The consultation follows rules introduced in 2014 for owner-occupiers which required borrowers to prove they can afford to make payments even if interest rates rise.

Amid fears landlords are pushing up house prices, Chancellor of the Exchequer George Osborne has already lifted the stamp-duty tax paid by investors by three percentage points, cut tax breaks and said he’ll grant the BOE so-called powers of direction over the buy-to-let market later this year. The central bank said while it expected these changes to have a temporary damping effect in the second quarter, buy-to-let lending will continue to grow after that.

OneSavings Bank Plc, a British bank backed by JC Flowers & Co., tightened lending criteria to deter “first-time startup, amateur landlords from ever bothering to apply,” Chief Executive Officer Andy Golding said in an interview earlier this month. The lender is asking inexperienced landlords for higher rental coverage and smaller loans as a proportion of the value of a property than for experienced borrowers, he said.

Secure Trust Bank Plc, a small British lender, said in its annual report it has “tempered” lending to residential-property developers, especially in London, as it assesses the impact of the government’s tax changes governing buy-to-let homes and ahead of the U.K. vote on European Union membership in June. About 60 percent of new homes in London are bought by investors to lease, according to 2013 data compiled by researcher Molior London Ltd.

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