Bid to rein in buy-to-let lending with stricter income and affordability checks

Amateur landlords will face tighter borrowing rules and stricter affordability tests under plans by the Bank of England to crack down on buy-to-let lending.

The Prudential Regulation Authority (PRA) - the arm of the Bank that regulates banks and the financial sector - said it wants lenders to make income checks more stringent for buy-to-let investors and test whether they can still afford their regular repayments at higher interest rates.

Its clampdown comes amid fears that Britain's booming buy-to-let market is overheating, with the Financial Policy Committee (FPC) also separately warning that surging levels of lending to landlords pose a risk to the property market and financial system.

The PRA said while most lenders already met minimum requirements for lending to buy-to-let borrowers, it found some had weaker underwriting standards.

Concerns over buy-to-let lending were among a number of risks also highlighted by the FPC in its quarterly statement.

In minutes of its latest meeting, the FPC said: "The macroprudential 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."

The Bank estimates that the plans to rein in buy-to-let lending could cut new approvals for buy-to-let mortgages by about 10% to 20% by the third quarter of 2018.

The Bank said it wanted lenders to check far more than just rental income and wants them to consider their wider finances, looking thoroughly at landlord income and taking into account rising taxation on buy-to-let investments.

It also wants lenders to ensure would-be borrowers could meet repayments if interest rates rose by 2% and assume a minimum rate of at least 5.5%.

Its proposals follow the PRA's review of lending standards in the buy-to-let sector, which covered 31 firms - around 92% of the market.

The FPC said the review revealed "some lenders are applying standards that are somewhat weaker than those prevailing in the market as a whole".

It added the planned measures will "guard against any slipping of underwriting standards during a period in which rapid growth plans could be challenged by the impact of forthcoming tax changes".

The PRA has put its proposals out for consultation until June 29.

The Bank's warning over the need to cool the buy-to-let market comes as new figures showed a rush by landlord investors to beat a stamp duty hike sent demand for homes surging to a 12-year high in February.

A report by the National Association of Estate Agents (NAEA) found more than eight in 10 - 85% - of estate agents reported an increase in the number of investors flooding the market ahead of a three percentage point stamp duty increase on the purchase of second homes, which starts on April 1.

The FPC said the total amount of outstanding buy-to-let mortgage loans had jumped by 11.5% year-on-year in the fourth quarter of 2015.

But it said growth was likely to slow after the April 1 rise in stamp duty.

The increase in buy-to-let stamp duty marks part of a series of measures aimed at preventing a bubble in the market.

From April 1, people buying a second home will pay three percentage points above current stamp duty rates, while Chancellor George Osborne has also previously announced measures to curb tax relief on buy-to-let mortgage interest.

The Government is also set to hand the FPC greater powers to intervene in the buy-to-let mortgage market by the end of the year, with Mr Osborne telling MPs in a Commons hearing last week this was set to happen "within months".

A consultation was launched by ministers last year after the FPC recommended it should be granted the power to direct regulators to require lenders to place restrictions on buy-to-let loans.

Andrew Montlake, director at Coreco Mortgage Brokers, said while the new guidelines stop short of an "all-out assault", landlords would feel "persecuted".

But he added: "Whilst many landlords will undoubtedly throw their hands up in the air at these more strenuous checks and procedures, we are unlikely to see all these rules dampen the demand of landlords too much, instead curbing the pace of growth in the buy-to-let market rather than putting up a brick wall and causing a head-on crash."

The PRA's research on the market found around a quarter of lenders had "less rigorous" underwriting standards and will need to tighten their requirements to meet the new proposed rules.

It also showed that lenders plan to increase buy-to-let lending by nearly 20% to more than £50 billion annually over the next two years,

The latest moves to curb lending are expected to restrict growth to around 17% a year, according to the PRA.

But the Bank has stopped short of more heavy-handed restrictions, such as capping the loan-to-value ratio.