The Bank of England says excessive lending to fund buy to let purchases could pose a risk to the financial well-being of the country and it hints this may have to be addressed by financial tools to limit BTL mortgages.
In its latest report the BoE says in the year to March 2015, buy to let lending expanded by 8.0 per cent and now accounts for 15 per cent (or more th one in seven) of the stock of outstanding mortgages. It also accounts for 18 per cent of new mortgage lending.
So far, so good - but then the report grows increasingly concerned at recent trends.
“The expansion of the buy-to-let mortgage market has been supported by strong competition between banks, primarily in lending rates. But there are signs of growing risk appetite spreading to underwriting standards [and] .... the number of advertised buy to let mortgage products at LTV ratios of 75% and above has increased since mid-2013” it says.
It goes on to hint that pressure for buy to let mortgages is likely to be growing at the moment thanks to ‘pension freedom’ changes, but then the Bank issues a stark warning:
“The actions of buy to let investors affect the broader housing and mortgage markets as individuals compete to buy the same pool of properties. Looser lending standards in the buy to let sector could contribute to general house price increases and a broader increase in household indebtedness.
“And in a downswing, investors selling buy to let properties into an illiquid market could amplify falls in house prices, potentially raising losses given default for all mortgages. This could be a particular concern in a rising interest rate environment, if properties become unprofitable given higher debt-servicing costs.
“Buy to let borrowers are potentially more vulnerable to rising interest rates because loans are more likely to be interest only and extended on floating-rate terms, and affordability tends to be tested at lower stressed interest rates than owner-occupied lending.”
The BoE report then adds that the Treasury will later this year consult on possible tools to be used by the Bank’s financial policy committee which could ultimately restrict buy to let lending.