An industry body says proposals by the Bank of England to curb buy to let lending are “premature.”
The Bank’s Prudential Regulation Authority says individual lenders should increase ‘stress tests’ on borrowers who would have to prove they could cover interest payments in a worst case scenario of interest rates rising to 5.5 per cent for a full five years.
But the Residential Landlords Association says that while no landlord should take on debt that they cannot afford, describes the proposals as premature given the introduction of a stamp duty surcharge and a phased reduction in mortgage interest tax relief for landlords.
“The Bank needs to be careful that it does not over-react to the current surge in buy to let applications which are aiming to beat the tax increases coming in April. It is likely that the impact of these will significantly reduce the demand for borrowing. We would urge the Bank to tread carefully and avoid any premature moves that could stifle the supply of the one million rental properties the country desperately needs” says David Smith, the RLA’s Policy Director.
The Prudential Regulation Authority says that its proposal, if ratified by the full BoE in the summer, could lead to a reduction in buy to let approvals by as much as 20 per cent by 2019; without such constraints, the authority says lenders anticipated a gross increase of 20 per cent in buy to let borrowing in the same period.
The PRA says it has looked at the major 31 lenders in the industry, which represent 90 per cent of buy to let lending in the UK.
Some three quarters of them already meet its new standards, the authority says, but five of the 20 biggest lenders currently use a ‘stressed interest rate’ of 5.47 per cent or lower - that’s below the new level set by the authority.
Concerns over buy to let lending are also highlighted by the Bank of England’s Financial Policy Committee in its latest set of minutes. They include a statement: "Macro-prudential risks centre on the possibility that buy to let investors could behave pro-cyclically, amplifying cycles in the housing market, as well as affecting the resilience of the banking system and its capacity to sustain lending to the wider real economy in a stress."