In its most recent Financial Stability Report, the Bank of England outlined a number of potential threats to the UK economy, one of which was the ongoing growth in the buy-to-let market.
The Bank appeared worried that buy-to-let lending now makes up 15% of all mortgage debt and 20% of all new mortgage lending underwritten in quarter one of this year.
In the report it said: “There are signs of growing risk appetite spreading to underwriting standards. Looser lending standards in the buy-to-let sector could contribute to general house price increases and a broader increase in household indebtedness.”
It also argued that due to the fact buy-to-let borrowers are more likely to have interest-only mortgages they are “potentially more vulnerable” to any interest rate rises.
Bob Young, Fleet Mortgages chief executive, said: “We at Fleet Mortgages would certainly echo the Bank of England’s concerns when it comes to the buy-to-let market and the future direction some inexperienced, non-specialists lenders are trying to take it.
“It’s our opinion that buy-to-let products which are badly put together and lending activity which is not thought through, is likely to be damaging for all stakeholders and it is a great shame that we are seeing this in the marketplace.
“It is undermining buy-to-let as a sector and is likely to mean the regulatory authorities take not just a keener interest in lending but also seek to secure far greater powers in order to restrict activity.
“We have certainly seen a growing appetite to lend in the buy-to-let space from non-specialists who are simply looking for higher returns and are drawn in by the sector’s unregulated nature and the higher yields on offer.
“This doesn’t necessarily chime with responsible lending and we are seeing a worrying loosening of criteria and a move up the risk curve which will undoubtedly raise further concerns for the Bank.”
Fleet Mortgages also said it has noted some concern around a growing number of products launched recently calculated on the pay rate of the loan rather than the more traditional ‘revert rate’.
The lender has itself been looking at a product offering based on pay rate but suggests there needs to be an understanding that these types of products should only be for a small, select group of high-quality borrowers.
Young added: “If you look at any financial product, we can see a pyramid structure in terms of who those products are appropriate for. A buy-to-let mortgage based on pay rate is no different; at the top of the pyramid is a small group of borrowers for whom the product will be completely appropriate.
“To our mind these are highly experienced landlords, with top of the range credit scores who have other income coming in, not just from the rent, and are able to clearly evidence this.
“As you move further down the pyramid these products become far less appropriate, for instance, a struggling landlord who has had previous credit issues, with all their income coming from the rent on their properties, should not be able to secure such products. My worry is that, in the quest for market share and higher margin, some lenders are actively targeting these customers with such products and are quite willing to provide lending via products which are completely inappropriate for the borrower concerned.
“The fact this is increasingly happening is storing up a considerable amount of trouble for all stakeholders and we can fully appreciate why the Bank of England might wish to act before this type of lending becomes even more prevalent. I have not been the greatest supporter of further regulation for our sector but it may well be that this type of looser lending approach is forcing the hand of the regulators to act quickly and decisively.
“The momentum is certainly moving this way and therefore all concerned need to re-evaluate their activity and ask themselves whether this pursuit of margin and market share at all costs is doing anyone in the sector any favours.”
