Hoskin Mortgages

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The Bank of England is likely to introduce stress tests for buy-to-let mortgages, which will restrict the amount landlords can borrow, brokers have warned.

It has been suggested that the Bank might look to use other tools other than interest rate rises to control the housing market without endangering growth in the rest of the economy. The Bank of England revealed they have an FPC, which works alongside the MPC. It has tools which can put limits on the amount of indebtedness that household can take on and so can reduce the banks’ ability to lend very risky loans.

The FPC is to receive powers to temper the buy-to-let market which could suggest tougher controls on lending to landlords. While the FPC is set to gain greater control over the sector, it is still down to the committee to decide whether to use the extra powers, which have yet to be decided.

When the Chancellor confirms the FPC’s powers over the buy-to-let market, they may try to introduce the same stress test as they require for residential mortgages, which is to test affordability against a 3 per cent interest rate rise. Because rental cover requirements for buy-to-let are normal 125 per cent at a 5 per cent interest rate, the stress test would have the effect of restricting LTVs. It is quite likely that the bank will do that at some stage next year.

The bank of England would like to curb the housing market and they might do something to limit buy-to-let LTVs. If they start stress testing for a 3 per cent increase in rates that would clearly cool the market and limit borrowing, but it depends on exactly how they calculate this.

Lenders are already starting to introduce stress tests though and buy-to-let growth has been slow and sustainable, with much of the increase in lending coming as a result of landlords re-mortgaging rather than new purchases.

For more help and advice on mortgages please contact us @HoskinMortgages.


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