Just when it looked as if things couldn’t get any worse for prospective buy-to-let investors – in particular the gradual withdrawal of higher rate tax relief for finance charges – the Bank of England’s Financial Policy Committee (FPC) will be granted new powers by the government to help it protect the financial system from future risks in the buy-to-let mortgage market.
The FPC is responsible for identifying, monitoring and taking action to remove or reduce systemic risks in the financial system. The new powers of direction will enhance the FPC’s existing macro-prudential toolkit - the tools it has at its disposal to head off potential threats to financial stability should they arise.
From early 2017, the FPC will be able to direct the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) to require regulated lenders to place limits on buy-to-let mortgage lending in relation to:
loan-to-value (LTV) ratios
interest coverage ratios (ICRs)
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 government consulted on the FPC’s recommended powers relating to the buy-to-let market from 17 December 2015 to 11 March 2016.
The consultation noted the positive impact of buy-to-let landlords in the economy, and the role they play in widening and balancing the overall housing market. They provide good quality accommodation for those who cannot at this point afford to buy a home, or who do not wish to commit to home ownership for personal or employment reasons. At the same time, the consultation set out the financial stability risks that buy-to-let lending may pose and how the FPC’s recommended tools would address these risks and ensure long-term economic stability.
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.