A key Bank of England body has revealed its proposals for tougher borrowing standards to prevent buy to let lending overheating the wider housing market.
The Prudential Regulation Authority says mortgage firms expect to grow their buy to let lending books substantially over the next few years - despite recent tax measures such as the three per cent stamp duty surcharge and phased reduction in mortgage interest tax relief.
The authority says action is required “to ensure underwriting standards did not slip” and BTL lending go out of control.
The PRA claims that without further constraints, lenders expect a gross increase of 20 per cent in buy to let borrowing over the next two to three years; it therefore says lenders should from later this year take into account how much cash borrowers have to cover their interest payments in a worst case scenario of interest rates rising to 5.5 per cent for a full five years.
The authority says this should ultimately reduce buy to let approvals by between 10 and 20 per cent by 2019.
Some three quarters of buy to let lenders 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 - so below the new level set by the authority.
If ratified by the BoE in late June, the measures will be be fully implemented this summer.
Just before the Easter break Chancellor George Osborne said it was “very likely” that there would be a further clampdown on the availability of buy to let mortgages.
Speaking to the Commons Treasury Committee Osborne admitted it was not a coincidence that the clampdown was coming just after the stamp duty surcharge and change in landlords’ mortgage interest tax relief - but was instead part of a wider package to restrict the lettings sector’s impact on the economy.
“The measures I have taken in the last couple of fiscal events - on additional stamp duty and on changes to mortgage interest relief - have been done in the knowledge that the Bank of England has concerns about a bubble emerging in this market” he told MPs.
“So in that sense, I am not saying there has been any collaboration - because they [the Bank] are entirely independent - but I have informed the Bank’s governor in advance of steps I have decided to take in this space, so I think we have a coherent approach” he said.