Just a few weeks ago PropertyQuoteDirect reported on the Bank of England’s new criteria for personal mortgages. At the time, those that work in the private rental sector were unsure of whether the Bank would also bring in harsher regulations for buy-to-let mortgages, and recently they have admitted that they have been considering it. However, even though the Bank of England have stated that they are looking into changing lending criteria for buy to let mortgages, they have no official plans as of yet.
The Bank’s Financial Policy Committee (FPC) stated that if there was another housing bubble both homeowners and landlords would suffer, which could increase homelessness in the UK. This is why the FPC want to protect both markets in order to ensure that when interest rates rise neither will go back to the same states as they were during the recession. A spokesman for the FPC added: “The FPC considered the need to monitor mortgage lending activity beyond the scope of the recommendation to ensure that financial stability risks did not shift to other lending institutions or forms of lending.
“This included close monitoring of the buy-to-let market, which would not be directly affected by this recommendation but where there was scope for financial stability risks to arise from increases in borrower indebtedness.” Discussing the FPC’s announcement, Neil Hudson of Savills research said: “The FPC is likely to get these powers in the summer and it may be during this period that we begin to see prospective borrowers struggle to get financing. Given the importance of first time buyers in the recent surge of market activity, any limit on their ability to borrow relative to current trends could lead to a slowdown in both house price growth and overall transaction levels.
“Unfortunately, this would also lead to prospective first time buyers remaining trapped in the private rented sector. Therefore, any move by the Bank of England to minimise threats to financial stability via the housing market should also be met by support from the government for the private rented sector. At a fairly constant 35% of total market transactions, even during the last year, the scale of cash buyer activity will dilute any intervention in the market by the Bank of England but should not prevent that intervention.”
Stephen Noakes, Group director of Mortgages for the Lloyds Banking Group, also discussed the issue, and said: “Whilst the housing market outside of London is starting to improve, the recovery is fragile and prices largely remain below their peak. It is important we don’t disrupt this recovery, but in London, house prices are almost now 30% above the 2007 peak. This is largely driven by issues of supply which are particularly acute in London and this is having an impact on income multiples which are failing to keep pace with asset growth.
“We’re not seeing such issues across the rest of the UK and therefore this is a targeted response to an issue largely in the upper tiers of the London housing market. This prudent update to our lending policies is intended to manage risks to our business and for our customers.” However, much like when the changes to the personal mortgage lending criteria were announced, there are those that feel that the Bank of England’s choices may have a detrimental effect on the housing and private rental markets if they are not careful.
For instance, Keith Osborne, editor of Whathouse.co.uk, says: “Just as lenders started to relax their criteria to allow more 90% and 95% borrowing, the Bank looks like it may come along and cap this type of lending in an attempt to control house prices. Some lenders have already changed their underwriting in order to make it more difficult for borrowers to access the finance that they need. The market has already reacted to the Bank’s concerns and so it makes sense for the Bank to let lenders to change their own criteria rather than stepping in prematurely.”
Even though nothing is currently set in stone when it comes to buy-to-let mortgages, it is likely that landlords will have to jump through more hoops in order to invest in a new property in the future. Stricter mortgage criteria could also lead to the cost of letting agent fees and landlord insurance policies increasing, which if not handled correctly could end up pushing a large proportion of the UK’s landlords out of the market.