The Bank of England’s Financial Policy Committee will be granted new powers by the government to control buy-to-let LTV and interest coverage ratios.
From early 2017, the FPC will be able to direct the PRA and FCA to require regulated lenders to place limits on buy-to-let mortgage lending in relation to LTV ratios and interest coverage ratios. The government says this will help the Committee “protect the financial system from future risks in the buy-to-let mortgage market”.
It follows the FPC recommending that it be given additional powers of direction over both the residential mortgage lending market and the buy-to-let mortgage market in September 2014. The government granted the FPC powers over the residential mortgage lending market in April 2015.
The Chancellor of the Exchequer, Philip Hammond, said: “It is crucial that Britain’s independent regulators have the tools they need to keep our financial system as safe as possible. “Expanding the number of tools at the Financial Policy Committee’s disposal will ensure that the buy-to-let sector can continue to make an important contribution to our economy, while allowing the regulator to address any potential risks to financial stability.”
In practice this means that lenders will be changing their rental stress testing to ensure compliance with this new approach. This will restrict lending by requiring a higher rental cover of the mortgage. Rental yields may be attractive to Landlords but ultimately will need to be unprecedently high to appease the new lending criteria.
With every lender adopting a different approach to buy to let properties and a distinct set of criteria, there has never been a more pertinent time to seek independent financial advice to navigate the changes afoot.