State banks prime the buy-to-let timebomb: BoE fears surge in loans to landlords could hit the economy when interest rates go up
By Alex Hawkes, Financial Mail on Sunday
The boom in buy-to-let lending, which has prompted the Bank of England to warn of a risk to stability, is being fuelled by a surge in lending to landlords by Britain’s state-backed banks.
Analysis by The Mail on Sunday reveals that Royal Bank of Scotland tripled its new lending to landlords in 2014, while Lloyds increased its stock of buy-to-let loans by £3billion to £53billion last year.
Total lending to landlords to buy properties is almost £200billion, the Bank of England said this month. It makes up 15 per cent of total loans, having represented just two per cent in 2000.
Surge: The boom in buy-to-let lending is fuelled by a rise in lending to landlords by state-backed banks
The Bank has said it is worried that the buy-to-let market could be hit harder by a rise in interest rates, and that forced selling by landlords could exacerbate house price falls and lead to big losses for banks. The Chancellor, meanwhile, moved in last week’s Budget to restrict the ability of high-earning landlords to claim back interest costs against tax.
A high proportion of buy-to-let loans are interest-only, a form of riskier lending that has become less popular for owner-occupiers.
Of the £53 billion that Lloyds has lent to landlords, the bank said that £48 billion was on an interest-only basis. Almost two-thirds of RBS’s £11.6billion in buy-to-let lending is interest-only.
Ray Boulger, a mortgage expert at broker Charcol, said: ‘With buy-to-let you would expect to pay the loans when you sell the property. With a repayment mortgage the cashflow would be horrible. The monthly repayments would exceed rental income unless you were borrowing a very small amount.’
The preference for interest-only loans means borrowers are likely to be more affected when interest rates go up. But despite the growth in the market, some say there are safeguards in place.
Boulger said: ‘No lender is offering more than 80 per cent of a property’s value. In practice it is hard to get more than 60 or 65 per cent.’
The low loan-to-value ratios – which compare with figures of up to 95 per cent for owner-occupiers –mean that if property prices do fall, buy-to-let borrowers would be likely to lose only their own money rather than the banks’. Lloyds said that it used ‘strict internal measures’ to monitor its buy-to-let lending.
Stephen Noakes, managing director for retail customer products at the bank, said: ‘We assess affordability on buy-to-let applications using a wide range of measures to stress test against different situations, including both rental and personal income assessments to ensure that landlords are not putting themselves at potential financial risk either now or should circumstances change in the future.’
An RBS source said that the bank had been ‘much more aggressive’ in the buy-to-let market. ‘We have streamlined our processes to make it easier, had more attractive rates and seen our lending increase,’ the source said.
RBS has stressed that it applies rigorous tests to its lending including a maximum loan to value ratio of 75 per cent for buy-to-let deals.
The Bank of England has said it is worried in part because there are signs that lenders might be reducing their lending standards. It points to the fact that there are many more buy-to-let loans available now at high percentages of a property’s value. But mortgage experts contend that there are simply more mortgages available now than there were in 2013, in all sectors.
Buy-to-let lending has grown in recent years in part because the market hardly existed before the 1990s. Rental controls that were swept away in the 1980s led to the market becoming more attractive as an investment.
The Chancellor introduced new tax charges for landlords in last week’s Budget, which could pour some cold water on the market.
High-earning landlords can claim back 45p for every £1 of interest payments they make, but the changes will mean that they can only claim up to 20p for every £1.
The Treasury is phasing in the changes from 2017, and the move will cost the sector £665 million by 2020. A fifth of landlords are expected to be hit by the move.
Property tax expert Phil Nicklin at accountancy giant Deloitte said: ‘A landlord who borrows at even a modest level might end up paying more in tax than he makes in profit. This measure must make buy-to-let investment a less attractive proposition in future and may reduce the options for those who see it as an alternative to a pension.’
Mark Garnier, Conservative MP for Wyre Forest, said the Chancellor’s changes should bring private landlords’ tax relief more in line with the rates of relief companies could claim, currently 20 per cent.
He added: ‘Buy-to-let has massively distorted the property market, resulting in rises in prices. We also don’t particularly want the nation’s working capital in non-productive assets. When you have a buy-to-let you don’t employ people to create widgets or manufacture aircraft engines.’