Buy-to-let poses potential threat to financial stability, says Bank of England Governor Mark Carney

The rapid growth of the buy-to-let mortgage market is considered one of the “main risks” facing the UK’s financial system, the Bank of England has warned.

In its latest Financial Stability Report, the Bank noted that buy-to-let mortgage lending now accounts for 15 per cent of the entire stock of mortgage debt in the UK, up from around 10 per cent in 2008 and just 1 per cent in 2000. This form of property lending also represented 20 per cent of new mortgage loans underwritten by banks in the first quarter of the year.

“There are signs of growing risk appetite spreading to underwriting standards,” said the report. “Looser lending standards in the buy-to-let sector could contribute to general house price increases and a broader increase in household indebtedness.” The Financial Policy Committee also stated buy-to-let borrowers are more likely than owner-occupiers to have interest-only mortgages or to have floating rates, they are “potentially more vulnerable” to any interest rate rises. Banks also stress-test prospective buy-to-let loans at lower hypothetical rates than the owner-occupied variety.

The Bank also dropped a hint it might like to receive powers to regulate the flow of buy-to-let loans. The Treasury has committed to consult later this year on whether to give the Bank’s Financial Policy Committee a “power of direction” to limit high loan-to-value or high loan-to-income buy-to-let mortgage lending.

In June 2014 the Bank moved to limit the flow of high loan-to-income owner-occupier loans, which it said “may” have contributed to the housing market’s slowdown.

The Bank said that there was a risk that the Government’s pension liberalisation could give “additional stimulus” to the buy-to-let market. “In principle... this could lead to an increase in demand for... buy-to-let property,” it said. However, the Bank added that any impact would be likely to be small, because most banks will not lend to retired buy-to-let landlords.

Introducing the latest report, Mark Carney, the Bank’s Governor, said that after slowing last year, momentum in the UK housing market is “showing signs of returning”.

Another main risk to financial stability identified by the Bank is misconduct by financial institutions. The Bank noted that the aggregate value of the regulatory fines paid by British lenders – ranging from insurance misselling to interest-rate manipulation – since 2009 is £30bn, roughly equivalent to the private capital they have raised to shore up their balance sheets.