The Treasury is to give the Bank of England’s Financial Policy Committee (FPC) more power to control buy to let lending, helping it to protect the UK’s financial system from future risk.
From 2017 the FPC will be given the authority to restrict the size of buy to let loans relative to the value of a property (LTVs) and also limit the size of loans relative to the amount of rent landlords receive to cover interest payments (interest coverage ratios).
The move follows a consultation that was launched by the Treasury in December last year.
The consultation was launched further to a request from the FPC for greater power over the residential and buy to let markets, in order to keep the UK’s financial system in good health.
The FPC was granted greater power over the residential market in April 2015 and a consultation regarding the buy to let market was opened from 17 December 2015 to 11 March 2016.
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.”
The FPC is expected to outline how it will use its new powers later this week. It will then be able to put these powers into action once legislation has been passed by MPs and peers next year.
Certain measures have already been introduced to prevent the buy to let market from over-heating, such as the introduction of a 3% Stamp Duty surcharge on buy to let and second homes, as well as forthcoming changes to lenders’ affordability assessments as required by the Prudential Regulation Authority.
As from 2017, tax relief for buy to let landlords will also be reduced to a flat 20%, as opposed to the current 40% and 45%.
The Bank is said to be monitoring the impact that these changes will have on the market and many lenders have already started to make changes to their lending terms and conditions, in order to meet the new requirements.
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