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Bank of England Will Monitor Buy-to-Let Market

The Bank of England has stated that it will take a closer look at buy-to-let mortgages in the coming months after more interest-only deals have recently been given to landlords.

The Bank’s Financial Policy Committee, which is responsible for pinpointing economic risks, met on March 24. According to the minutes, members had observed a growing share of interest-only mortgages being granted in buy-to-let lending. It was agreed that developments would be monitored closely.

The Bank previously stated that debt overload can be detrimental to the economy, with a full two-thirds of banking crises being preceded by boom-and-bust housing activity. Recessions that come on the heels of property booms have been up to three times deeper on average than those that have not.

The committee concluded that the risk that the property market posed to the economy had not gone up since it met in February, although average household debts in the UK remained high.

The Council of Mortgage Lenders stated that mortgage lending rates in general have been going down, with January’s gross lending clocked at 15.5 percent lower per year-on-year.

But a review of the loan types being taken out show that buy-to-let mortgages are going from strength to strength and assuming a greater share of house purchases.

The CML said that loans to first-time house buyers in January were down 27 percent on the December totals, and 14 percent year-on-year. Home mover loans were also lower by 24 percent compared to December and 17 percent year-on-year.

There were, however, 18,200 buy-to-let loans issued in January, which is a 6 percent increase on December and a 12 percent rise compared to the year before.

Members of the FPC said that the property market situation meant that the mortgage lending restrictions that it recommended in June 2014 were still warranted.

These limitations required mortgage lenders to verify that borrowers could afford a point rise of 3 percent in their mortgage rate before granting a loan, and that a maximum of 15 percent of new mortgages granted should be for amounts greater than 4.5 percent the applicant’s income.

 

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In late 2014 the FPC asked the Treasury to require the banks to apply these limits in the future. Additionally, it requested the ability to officially limit the debt-to-income ratios for buy-to-let loans. This would include the Interest Coverage Ratios that lenders use to determine affordability.

This ratio is a property’s rental income divided by the interest payment on the mortgage loan. The result is expressed as a percentage.

The Treasury conceded that the Bank should be able to limit the residential mortgage market, but it wants more evidence that the buy-to-let market presents a sufficient economic risk. It held off consultations on buy-to-let limits until after the election is over.

In the meantime, bodies regulating lender trade came together recently to establish a ‘statement of practice’ for buy-to-let mortgages. Topics covered include the ways that these loans are marketed and the obligation of lenders to properly determine borrower affordability.

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