Bank of England cites buy to let boom as a risk to financial stability

The Bank of England is ready to take action and use its powers to control buy to let lending, if necessary, so as to protect and enhance the UK’s financial stability.

In its latest Financial Stability Report, the Bank states that it will closely monitor the sector’s activity following the cut to tax relief recently announced by the Chancellor.

Highlighting that lenders’ underwriting standards are under review, the Bank advises that it will not look favourably on any relaxation of the lending criteria being offered by mortgage companies, such as reducing the size of deposits or income requirements.

Last year the Financial Policy Committee (FPC) introduced regulations limiting the number of owner-occupier mortgages worth more than 4.5 times the borrower's income and implementing stress tests on the borrower's ability to repay.

However, new loans to buy to let investors are often subject to much less stringent affordability tests, the report says.

"The committee remains alert to the rapid growth of the UK buy-to-let market, and potential developments in underwriting standards, as the sector could pose a risk to broader financial stability,"

the Bank of England says in its report.

The buy to let sector continues to drive growth in the UK mortgage market.

Since 2008 the sector has boomed: the outstanding stock of buy to let lending has grown by 5.9% on average, compared to 0.3% growth in the stock of lending to owner-occupiers.

Some reports say that it is now close to its pre-crisis peak.

The report raises concerns that ‘buy to let borrowers may be more vulnerable to an unexpected rise in interest rates or a fall in income, which could exacerbate the scale of a fall in house prices.’

Speaking on the Radio Four Today programme, Sir Jon Cunliffe, Deputy Governor of the Bank of England said:

‘Buy to let has grown faster than any other part of the housing market. When you find one sector of the property market growing fast ... then I think you have to ask questions about… are there risks here? And you have to monitor those risks and if necessary you have to take action to curtail those risks.’