BOE to Monitor Buy-to-Let Borrowing for Risks to U.K. Financial Stability -- Update
By Jason Douglas
LONDON--Bank of England officials intend to monitor buy-to-let borrowing in the U.K. for potential risks to financial stability, a sign of officials' concern that risky lending may be taking place outside the normal mortgage market.
The BOE on Thursday told banks not to give more than 15% of new home loans to home buyers borrowing more than 4 1/2 times their annual income. It also told lenders to perform stricter tests to ensure borrowers can repay their loans when interest rates rise.
BOE Gov. Mark Carney said the new rules were designed to act as "a firebreak" to stop the buildup of risky debts in the economy. Officials stressed their policies weren't aimed at arresting sharp rises in British house prices.
But officials at their policy meeting in June noted the potential for riskier lending to shift elsewhere in response to their recommendation, perhaps to non-regulated lenders or other forms of mortgage-finance, according to a record of their discussions published Tuesday.
"The committee considered the need to monitor mortgage lending activity beyond the scope of the recommendation to ensure that financial stability risks did not shift to other lending institutions or forms of lending. This included close monitoring of the buy-to-let market," according to the record of officials' meeting June 17.
Buy-to-let lending, where buyers purchase a home to rent it out, isn't covered by the tougher rules announced Thursday. Buyers in this segment of Britain's real-estate market tend to require much bigger down payments, however, which would normally be expected to shield them against losses.
Cheap loans and high rents have made buy-to-let borrowing big business in the U.K. After a slump in 2008, the market has bounced back: Banks approved new buy-to-let loans worth GBP2.2 billion ($3.76 billion) in April, an increase of 57% on a year earlier, according to recent data from the Council of Mortgage Lenders. Buy-to-let borrowers represent around 10% of the overall mortgage market, according to the BOE.
The BOE's warning shows that officials are concerned that private landlords may take on debts they may struggle to repay, potentially saddling banks with big losses and undermining Britain's economic recovery.