The Bank of England is scrutinising the terms under which mortgages are being granted to buy-to-let landlords for fear they could be more vulnerable than other borrowers to a rise in interest rates.
Outlining its latest set of concerns about the rapidly growing buy-to-let sector, the Bank said it was on the lookout for any relaxation of the lending criteria being offered by mortgage companies, such as reducing the size of deposits or income requirements.
The buy-to-let sector has driven growth in the mortgage market since the 2008 financial crisis and the flow of lending in 2015 is close to its pre-crisis peak. In the first nine months of 2015, buy-to-let lending rose by 10% compared with 0.4% for owner-occupied homes.
The terms of buy-to-let loans are often less stringent than for owner occupiers. Lenders require rental income to exceed 125% of interest payments at a mortgage rate of 5% to 6%. Homeowners are required to meet a higher interest rate test of 7%. The Bank found that if mortgage rates were to increase by three percentage points, nearly 60% of buy-to-let customers would breach the test while only 4% of homeowners would be likely to experience repayment difficulties.
The Bank has already said it is concerned that any loss of confidence in the buy-to-let sector could exacerbate house price falls as 15% of buy-to-let customers would sell their properties if they could not meet their loan commitments through rental payments.
While the Bank is not yet taking action on the buy-to-let sector despite a number of warnings, it is also assessing the impact that George Osborne’s extra 3% stamp duty on buy-to-let homes, announced in last week’s autumn statement, will have on the sector.
Barclays is one lender that has already begun to make changes, altering the rental income criteria from 125% to 135% for all new applications.
Andrew Montlake, the director of Coreco mortgage brokers, said other lenders could follow: “This is a big change from Barclays and could well spark a number of similar reviews from lenders who want to be seen to be taking into account the effect of forthcoming tax changes.”
The Bank is also watching the commercial property sector, which fared badly during the 2008 crisis, falling 44% peak to trough compared with 20% in the residential property sector. Prices have risen strongly since 2013, particularly in London, but rents are rising at a slower pace. Foreign lenders are stepping in and now account for 60% of all new lending to commercial property, the Bank said.
The Bank also noted that the scale of borrowing to fund commercial property investments had increased in London.
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