Riskiest rental home loans surge as UK delays curbs

With residential landlords owing £188 billion at the end of last year, the Bank of England wants to regulate booming rental home market

PUBLISHED : Wednesday, 04 March, 2015, 6:00am
UPDATED : Wednesday, 04 March, 2015, 6:00am

The Bank of England is seeking to regulate the country's booming rental home market that is delivering annual returns of almost 12 per cent and increasing risks for the economy. The government is making it wait.

While regulators have tightened lending rules for homeowners to curb runaway price growth and limit lenders' risks, the government has held off on giving the central bank greater authority to regulate mortgages to buy investment properties, as demand for rental homes is soaring, particularly in London.

"One of the things London is desperately short of is rental properties," said Mark Clare, the chief executive of homebuilder Barratt Developments. "We need more buy-to-let rather than less and that's something government has pushed."

Central bank officials asked for more powers to regulate buy-to-let lending in October last year, and the government said last month that nothing would happen until after May's national election.

BOE officials are concerned investors are fuelling home price inflation, forcing owner-occupiers to take on bigger loans and increasing default risks because about 66 per cent of landlords, the most since 1987, only repay interest on their mortgages. They repay the principal when the property is sold.

Loans for investment properties surged 40 per cent in the past six years to a record £188 billion, according to the Council of Mortgage Lenders, while the amount owed by homeowners rose just 6 per cent. About 60 per cent of new homes in London are bought by investors to lease, according to data compiled by researcher Molior London.

The number of landlords investing in property made it more difficult for those seeking to buy a home of their own, website Rightmove said last month.

"The strong rise of buy-to-let in recent years has led to lots of new flats being built," said Scott Corfe, the head of macroeconomics at the Centre for Economics and Business Research. "The property market has been distorted into building more of the types of properties that buy-to-let investors want, rather than what we actually need - which is more family homes."

The government delayed the buy-to-let mortgage decision because it wants more evidence about how the market "may carry risks to financial stability", according to a February 2 filing. A consultation on the proposals, including limits on loan-value and debt-income ratios, would be held "early in the next parliament", the filing said.

Buy-to-let lending surged ahead of the financial crisis. It rose more than 27 per cent to £127.5 billion in the year to March 2008, according to CML data. Values began falling the following month as the credit crunch took hold even as the amount owed by landlords continued to rise. The repossession rate for buy-to-let mortgages last year was 0.3 per cent, against 0.17 per cent for homeowners, according to CML.

"Risky mortgage lending has contributed significantly to financial stress in this country and elsewhere in the past and it's sensible for the government and the BOE to look at it," said Jonathan Portes, the director of the National Institute of Economic and Social Research.

Buy-to-let lending climbed to almost 20 per cent of the value of all new mortgage loans by early 2008 and fell to less than 10 per cent by late 2009 as home prices slumped during the financial crisis, according to the BOE. Soaring home price values, especially in London, have tempted landlords back.

The record £188 billion owed by residential landlords at the end of last year compares with a record high of £1.3 trillion in outstanding mortgages to homeowners, according to BOE data.