Bank fires starting gun on buy-to-let crackdown

Fears of property crash are behind plan by regulators to limit landlords

THE Bank of England could launch a crackdown on buy-to-let lending as soon as Tuesday amid fears that future rises in interest rates could trigger a property crash.

Most buy-to-let loans are interest-only and regulators are concerned that sudden sell-offs by landlords in the event of rate hikes could prove disastrous for the market.

Buy-to-let lending has surged in recent years. In 2000 it represented just 2 per cent of total lending, but now it makes up 15 per cent of lenders’ mortgage books, with Lloyds Bank and building societies Nationwide and Coventry leading the way.

Bank of England officials have said they are worried about the level of hypothetical interest rate figures used in stress tests relating to buy-to-let loans. Lenders usually ask buy-to-let borrowers to prove that their rental income will cover 125 per cent of interest payments at a rate of 5 per cent.

Experts believe the Bank could rule that the projected future interest rate figure should be pushed up to 7 per cent. Ray Boulger, a mortgage broker at John Charcol, said mandating a 7 per cent stress test would bring buy-to-let regulations into line with the rest of the mortgage market. ‘It would have quite a big impact,’ he predicted.

Another option would be to introduce a restriction on the maximum loan size as a percentage of the property price. Lenders typically do not lend out more than 75 per cent of the value of a buy-tolet property.

Chancellor George Osborne said last week that he wants the Bank’s Financial Policy Committee to have new powers to control buy-to-let. But a separate branch of the Bank – the Prudential Regulation Authority – is conducting an investigation of lending standards and it already has the power to rein in lenders. Its report is due on Tuesday.

The Mail on Sunday revealed earlier this year that Lloyds Banking Group – the largest player in the £200billion buy-to-let market – has already reined in its loans, opting to grow at a slower pace than the market overall. The Bank of England has said it is worried about smaller lenders in particular.

Meanwhile, brokers, solicitors and lenders were scrambling this weekend to complete deals on behalf of landlords and second-home buyers anxious to avoid a 3 percentage point stamp duty hike coming in on Friday.

Boulger said he expected the number of deals done in March to be 20 per cent higher than they would normally be as April sales are brought forward.

Nationwide is set to report on Friday that house prices rose by 5.3 per cent year-on-year to the end of March, according to consultancy IHS Global Insight.