Treasury consulting on BTL regulation
Update: on 17 December, the government launched its consultation on Financial Policy Committee powers of direction in the buy to let market, which will close on 11 March 2016. More details can be found on the government website.
The increasing popularity of buy to let investment and the low interest rate environment that has prevailed for several years have caused the sector to boom, with the outstanding lending stock growing by an average of 5.9% per year since the financial crisis, compared to just 0.3% growth for owner-occupier lending.
The sector is under increasing pressure as a result. Commentators expect the Treasury to consult this week on granting greater regulatory powers to the Bank of England, with a view to coming to a final decision in 2016 on how the powers will work (FT.com).
The Bank of England has already requested powers to regulate buy to let
In 2014, the Bank of England’s Financial Policy Committee requested interventional powers in order to curb higher-risk mortgage lending. The following April, the Treasury granted the FPC ‘powers of direction’ over financial market regulators to limit debt-to-income and loan-to-value ratios for owner-occupier mortgages (Gov.uk).
For the buy to let sector, however, the FPC still has only ‘powers of recommendation’, which means it cannot yet force banks to change their lending practices.
The Bank of England has repeatedly claimed that the buy to let sector could pose a risk to the wider economy. In its latest Financial Stability Report, it claimed that buy to let borrowers may be “more sensitive to rising interest rates”, and that it would “monitor developments in buy to let activity closely” in the coming months.
The Treasury was due to consult this year on granting further powers to the FPC. In a surprise statement issued in October, however, chancellor George Osborne claimed that he had already granted these powers, suggesting that the consultation is little more than a formality (Telegraph.co.uk).
Further proposed changes could harm smaller and specialist BTL lenders
On Thursday, the Basel Committee on Banking Supervision (BCBS) – a multinational banking supervisory forum – unveiled draft rules that would compel lenders to set aside twice as much capital to cover property loans that are dependent upon rental income, including buy to let mortgages in the UK (UK.Reuters.com).
The revisions to the Basel model, which applies to all but the largest banks (who are allowed to use in-house models to determine risk weightings), will compel banks to set aside 70% of the value of any buy to let loans on their books with a loan-to-value (LTV) ratio of 60–85%.
This would make it more expensive for banks to lend funds to buy to let borrowers, and could reduce the supply of loans. City A.M. reports that bosses from ten specialist lenders will meet with the Treasury this Wednesday to argue against any changes.
Landlords are already under attack
Changes to the way buy to let properties and rental income are taxed could also have significant implications for many landlords.
In November’s Autumn Statement 2015, the chancellor revealed that from April 1 2016, people buying second homes and buy to let properties would pay 3% more in stamp duty than people buying homes to occupy as their main residence.
This is in addition to changes to the way buy to let income is taxed. From April 2017, landlords will no longer be able to claim full tax relief for buy to let mortgage interest.
Large corporate borrowers will be exempt from both new rules, however, leading commentators to predict that landlords will begin to incorporate their businesses into limited companies in order to save money.
Expert view: Forward-thinking landlords can still be successful
Commercial Trust’s director, Andrew Turner, believes that excessive regulation could be harmful, but that there is still great potential for buy to let to be profitable.
By intervening in the buy to let market the government could shoot itself in the foot by deterring needed investment in rental properties and causing rents to rise, without making homes any more affordable for owner-occupiers.
Fortunately, there are many options for prudent investors. Private landlords are crucial to the UK housing market, and the viability of property investment is underpinned by the strength of the asset and consistently rising tenant demand.
That the value of UK stocks has fallen by a total of 9% so far this year – thanks to a combination of a shaky global economy, falling oil prices and the expected rise in the US Federal Reserve Rate later this week – serves to demonstrate the virtues of a long-term investment, such as property, that is resilient to short-term movements in financial markets.
Landlords who are able and willing to adapt their strategy will be able to continue enjoying successful and profitable businesses.”
This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.