Buy-to-let lending buffeted by the winds of change

The buy-to-let sector, for so long the star performer in the UK mortgage market, has fallen victim to its own success. Legislators worried by the rapid growth in buy-to-let lending have taken decisive action to reduce its size.

Since the financial crisis, the buy-to-let market has seen astonishing growth, with gross lending rising from a low of £7.9bn in 2009 to £40.0bn in 2016, which equates to a more than 400% increase. This compares to growth in mortgage lending relating to primary residences of just 60% over the same period.

However, this massive growth raised concerns among policymakers. The Bank of England’s Financial Policy Committee (FPC) has noted that buy-to-let activity may amplify housing market cycles and adversely affect the resilience of the banking system. Political opposition to the buy-to-let sector has also emerged, with critics claiming it is pricing first-time buyers out of the market.

As a result, several new pieces of legislation have been announced, some of which are already in force, aimed at reducing the demand for and controlling the supply of buy-to-let finance. These are:

Reducing tax relief on buy-to-let mortgage interest payments.
A 3 percentage point surcharge on stamp duty levied on purchases of additional homes.
Mandating lenders to set minimum standards for underwriting buy-to-let mortgages, in respect of interest coverage ratios (ICRs) and affordability tests.
Requiring lenders to set limits on buy-to-let lending with respect to LTVs and ICRs.

These measures have already had a significant impact on the market. Following a spike in Q1 2016 as investors aimed to beat the stamp duty hike, activity dropped off during the rest of the year, and figures for January 2017 show that the decline has continued.

The glory days of buy-to-let lending may be over, but in their place is a more sustainable market that should prove more stable in the longer term.

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