The financial editor of The Guardian newspaper claims that - despite widespread criticism within the lettings industry of the latest buy to let mortgage clampdown - the sector has actually been “let off the hook” by the Bank of England.
Nils Pratley claims that this week’s set of proposals from the Bank’s Prudential Regulation Authority - urging individual lenders to increase ‘stress tests’ on landlord borrowers - are actually small-fry.
“In reality, those stricter standards are merely sensible ones that most lenders have adopted already. The Bank is only talking about testing a borrower’s ability to pay an interest rate of 5.5 per cent when all tax liabilities are properly taken into account. That is hardly onerous when fixed-rate deals in the buy-to-let market are generally pitched around the 3.5 per cent mark” insists Pratley.
The PRA 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.
However, Pratley is unconvinced.
“Would-be landlords – or, at least, those who weren’t planning to perform advanced gymnastics with their personal finances – will not tremble. All that will happen is that some banks will have to apply slightly stricter lending standards” he says.
And he says that even with the latest measures, there is still a potential threat to the wider economy by what he judges to be the apparent volatility of buy to let.
“With buy to let lending already close to 2007 levels as a share of the overall mortgage market, the Bank had room to be bolder, for example by placing caps on loan-to-value ratios. Instead, it has reached for one of the smallest tools in its new kit-bag. It may be a case of too little, too late” claims Pratley.