In its response to the Treasury’s consultation on buy to let powers for the Financial Policy Committee (FPC), the Council of Mortgage Lenders (CML) is urging caution and asks that no further intervention is made until it is known what effect the current changes in taxation will have on the buy to let market.
While accepting the fact that robust macro-prudential regulation of the mortgage market, including buy to let, is required the CML says:
“...we urge caution over the cumulative effects of intervention in the market, given that landlords have yet to absorb the effects of a series of tax changes that are likely to have significant implications for the private rented sector.”
The trade body highlights that buy to let borrowers are a diverse group.
While three-quarters have a single property, a small proportion of the group own 10 or more dwellings.
As such a ‘one size fits all’ regulatory system should be approached with caution.
The Treasury’s recent consultation has also touched on giving the FPC power over loan to value (LTV) caps and rental cover ratios.
In response the CML commented:
“In recognising the over-riding need for the FPC to have at its disposal all necessary macro-prudential tools, our submission argues that any decision to apply them is a much bigger step.
“We believe that they should only ever be used with great sensitivity, and preferably only after consultation and the publication of analysis and assessment of the likely effects.”
The CML questions the often made assumption that the buy to let market reinforces the cyclical nature of the housing market, and therefore increases volatility.
“On one hand, borrowers do draw on growing income and housing equity to fund further borrowing, usually on an interest-only basis. But on the other, they tend to be long-term property investors. And there are other forces on the market which are counter-cyclical, with demand from tenants increasing when the housing market turns down.”
It also says that data on buy to let mortgages before the financial crisis is patchy, so evidence on the counter-cyclical nature of the market is unclear.
“What we do know, however, is that the sharp contraction in buy to let activity as a result of the financial crisis was primarily driven by the collapse of the global securitisation markets upon which many buy-to-let lenders then relied. This pattern is unlikely to be repeated now that lenders have more varied, stable and reliable funding options.”
The CML says some lenders favour a more bespoke approach to assessing affordability, taking into account customer profile and mortgage product features, and it says that this approach to “underwriting the whole customer” might better reflect the borrower’s circumstances, the affordability of the mortgage and market risk.
It also suggests that, in considering whether to set minimum interest cover, regulators should consider whether the ratio should take into account the impact of void periods, the cost of maintaining the property, and whether or not any limit should apply before or after tax.
“Lenders do not dispute the need for robust macro-prudential regulation of the buy to let sector, but it is crucial that regulators have the right powers – and that they use them in the right ways,”
the CML concludes, while also noting that the sector may also soon be affected by proposals from the Basel Committee on Banking Supervision, and as such it will be crucial for the regulators to be aware of the cumulative impact of intervention in the buy-to-let market.
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