Bank of England Wants Buy to Let Interest Ratio Control

Bank of England Wants Buy to Let Interest Ratio Control.

We have already speculated in a new story earlier this week that buy to let mortgage lenders may change their lending criteria all their buy to let rental cover to interest ratios as a result of increases to Stamp duty land tax on buy to let and second home residential property purchases with effect from 1 April 2016.

The governor of the Bank of England, Mark Carney, has now ‘thrown his hat into the ring’ in his Financial Stability Report by suggesting that he would like the Financial Policy Committee (FPC) to be given power to control rental cover ratios of buy to let mortgage lenders.

The market standard rental cover to interest ratio is usually around 125%. What this means is that the rent received on an investment property should be larger than the interest payable on any buy to let mortgage to the tune of one and a quarter times i.e. 125%.

Why does Mr Carney want to control rental cover?

In simplistic terms he is trying to control stability of the property market. If interest rates rise, which they will, it is estimated that 60% of buy to let landlord/borrowers would see their rental cover fall below 125% of interest payments due in interest rates rise by 3% per annum. This could result in the following:

• Landlords being put under pressure by their mortgage lenders to increase rents
• Tenants being put under pressure if there rents increase
• Mortgage lenders being put under pressure if they are at greater risk of default because there is not enough rent to cover interest payments if they need to repossess

Stability is key in the property market but we believe it is a difficult thing to control as market forces always force markets either way.

Comment

By applying rental cover ratio control, it is a little like ‘the tale trying to wag the donkey’ and we do not favour the Bank of England or governments trying to play with such huge market forces.

We believe that the requirement of all mortgage lenders to only offer suitable and affordable mortgage lending with stress tests on affordability if interest rates rise should suffice.