Higher regulation of BTL is credit pos­i­tive for UK bank­ing

Re­cent mea­sures to cool the buy-to-let (BTL) mort­gage mar­ket will sup­port the cred­it­wor­thi­ness of the UK bank­ing sys­tem by help­ing to en­sure ro­bust lend­ing stan­dards, ac­cord­ing to Moody’s In­vestors Ser­vice.

Financial Mirror (Cyprus) - - FRONT PAGE -

“Once im­ple­mented, the UK govern­ment’s tax and stamp duty ini­tia­tives should help to tem­per the growth of the BTL sec­tor,” said Ric­cardo Ri­nal­dini, an an­a­lyst at Moody’s. “This should re­duce the tail risk of a sharp de­cline in house prices from a con­cen­trated mar­ket sell-off when in­ter­est rates even­tu­ally rise.”

While the cur­rent favourable eco­nomic en­vi­ron­ment — in­clud­ing low un­em­ploy­ment and low in­ter­est rates — has helped keep BTL mort­gage ar­rears low, the BTL sec­tor could neg­a­tively af­fect UK banks if things change.

“We con­sider BTL mort­gages to be in­her­ently riskier than owner-oc­cu­pied mort­gages,” ex­plained Ri­nal­dini. “If bor­row­ing costs rise and rental in­come no longer cov­ers land­lords’ in­ter­est pay­ments, a broad based sell-off of BTL prop­er­ties could fuel a fall in house prices, neg­a­tively af­fect­ing all banks and build­ing so­ci­eties in the UK.”

The rat­ing agency says the ini­tia­tives help en­sure ro­bust lend­ing stan­dards, which sup­ports the cred­it­wor­thi­ness of banks and build­ing so­ci­eties, even if they re­duce a source of rev­enue for some banks by slow­ing the growth in BTL orig­i­na­tion.

“The Trea­sury’s Au­tumn state­ment an­nounce­ments have cost im­pli­ca­tions that will ham­per growth in the BTL mar­ket. Th­ese cost im­pli­ca­tions could de­ter new bor­row­ers from en­ter­ing the mar­ket, thereby damp­en­ing the de­mand for BTL loans in the medium term,” said Greg Davies a Moody’s As­sis­tant Vice Pres­i­dent in Struc­tured Fi­nance.

“How­ever, se­cu­ri­tised trans­ac­tions backed by BTL mort­gages will ben­e­fit from the UK’s sta­ble hous­ing mar­ket and strong un­der­writ­ing cri­te­ria. There­fore, the de­crease in BTL loan orig­i­na­tion will not have a neg­a­tive im­pact on the per­for­mance of trans­ac­tions backed by BTL mort­gage loans,” added Davies The vol­ume of out­stand­ing BTL mort­gages in the UK has more than dou­bled since 2007 to GBP 176 bln at year-end 2015 (15% of res­i­den­tial mort­gage loans) from GBP 85 bln in 2007 (9%).

Greater har­mon­i­sa­tion of the treat­ment of the BTL mort­gage mar­ket seg­ment with that of the owner-oc­cu­pied sec­tor will also be credit pos­i­tive for the UK’s bank­ing sec­tor, in Moody’s view. The rat­ing agency notes that — from a con­duct point of view — 98% of out­stand­ing BTL mort­gages were not un­der the Fi­nan­cial Con­duct Au­thor­ity’s scope in Septem­ber 2015. Of the 2% that were in scope, most in­cluded loans se­cured on the prop­erty of a bor­rower’s close rel­a­tive.

Re­cent ac­tions from the Trea­sury and the PRA in­clude the Trea­sury Tax Re­lief Cuts, the Trea­sury’s Con­sul­ta­tion to grant the Fi­nan­cial Pol­icy Com­mit­tee (FPC) pow­ers of di­rec­tion on the BTL sec­tor; the PRA re­view of BTL un­der­writ­ing stan­dards; and im­ple­men­ta­tion of the EU Mort­gage Di­rec­tive.

That house prices are ex­tremely high in Lon­don is by now no se­cret. But re­cent fig­ures from the Na­tional Hous­ing Foun­da­tion show that the gulf be­tween av­er­age earn­ings and av­er­age house prices in the Bri­tish cap­i­tal is per­haps even larger than some would have sus­pected.

As­sum­ing the av­er­age Lon­doner would like to buy a house in the bor­ough they cur­rently re­side in, the per­cent­age in­crease in earn­ings re­quired to get an 80% mort­gage range from 105% in Bex­ley to a com­pletely unattain­able 653% in Kens­ing­ton and Chelsea. Even for those who are re­al­is­tic enough to have given up on the dream of own­ing a piece of prime real es­tate in Kens­ing­ton, the av­er­age earn­ing Lon­don res­i­dent (GBP 32,838) would need a pay in­crease of 266% to get a

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