BofE concern over BTL lending

The Bank of England December 2015 Financial Stability Report has been published.

In it, the BofE share their concern over the continued growth of the buy-to-let sector for UK financial stability.

The Financial Policy Committee are to keep a close eye on the BTL sector to see what impact this year's raft of tax changes announced by George Osborne will have.

The report shows the differing fortunes of BTL and homeowner lending -

• BTL lending has grown by an average of 5.9% per year since 2008, compared with only 0.3% per year for owner occupier lending.
• In  Q3 2015, BTL rose by 10%, compared to 0.4% for owner-occupiers. 

The report puts the growth in BTL down to a 'reduced availability of high loan to value (LTV) mortgage lending, which has increased the age at which many potential first-time buyers leave the private rental sector,' alongside the UK's continued high net migration.

The report recognises that BTL remains an attractive investment option thanks to -

• high rental demand.
• low interest rates on BTL mortgages. 
• low returns on alternative investments. 

The BofE have concerns that any slip in BTL underwriting standards could have implications for UK financial stability, with BTL borrowers already more sensitive to a rise in interest rates due to affordability tests relating to rental incomes and not occupation incomes.

The report gives the example, 

'if mortgage rates rose by 300 basis points, the increment by which the FPC recommended the affordability of mortgages to owner-occupiers is tested, nearly 60% of buy-to-let borrowers who took out loans recently would see their rental income no longer covering 125% of their interest payments. By comparison, only 4% of recent owner-occupier borrowers would see their mortgage debt costs rise to above 40% of income, a level above which households are more likely to experience payment difficulties' 

The FPC states it 'remains alert to financial stability risks arising from rapid growth in buy-to-let lending and will monitor developments in buy-to-let activity closely following the tax changes to the buy-to-let market announced by the Chancellor in the Budget and Autumn Statement.'

The FPC is waiting a decision from HM Treasury to see if is handed similar powers to those it has over owner-occupier mortgage lending to help manage the BTL lending sector.

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