The government is due to discuss new powers that will allow the Bank of England to lead the rapidly growing buy-to-let mortgage market.
Chancellor George Osborne is hoping this will prevent landlords exacerbating movements in house prices and creating a threat to financial stability.
It’s possible that officials could limit the proportion of high loan-to-value mortgages given out in the buy-to-let sector, or the number of loans given to landlords who expect the rental income to only just cover their repayments may be cut.
In addition, Bank of England Governor, Mark Carney, has warned that the buy-to-let sector could be a source of risk in the financial industry (1).
He’s argued that landlords may be more likely to sell up whenever interest rates rise or house prices dip, creating a cycle of falling prices which will negatively effect homeowners and banks (1).
The Treasury has implied that the Bank of England could order banks and building societies to limit the sums they lend to landlords.
This could be done in two ways: either by taking into account the size of the loan in relation to the property’s value, or by taking into account whether the landlord’s rent covers their mortgage (2).
Figures show that in June there were 1.7m outstanding by-to-let mortgages, worth £201 billion. This is 16% of the residential mortgage market, up from 12% in 2008 and 4% in 2002 (3).
Similar measures have already been enforced by the Financial Policy Committee (FPC) for ordinary household mortgages. Lenders are only allowed to give 15% of their loans to high-risk residential borrowers. This applies to those who have borrowed more than 4.5 times their income (2).
(1) The Telegraph- Bank of England set to be handed new buy-to-let powers 18/12/2015
(2) The BBC- Bank of England to get new powers on buy-to-let lending 17/12/2015
(3) The Guardian- Bank of England to be given powers to rein in buy-to-let market 17/12/2015