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BTL regulation should be used in the right way says Council of Mortgage Lenders

Monday 11 April 2016

New plans to regulate the BTL sector have received qualified backing from the Council of Mortgage Lenders (CML) following a consultation by the Treasury. 

The Government wants to give the Financial Policy Committee (FPC) the power to impose limits on BTL loan-to-value ratios, and the interest cover ratio (rental income relative to the cost of the mortgage).

But the Council is urging the Government to be cautious about exercising these powers as the impact of recent tax changes on landlords has yet to be fully measured.

It warns new measures, like the 3 per cent stamp duty hike and exemption from Capital Gains Tax reductions, will force some landlords to stop buying new properties and in some cases sell. 

Relief will be claimable as a tax credit after the normal income calculation, which means a landlord’s taxable income will be ‘inflated’ by their full rental income. 

Recent surveys show that the tax changes have hit landlord confidence hard, and it is now lower than it was the start of the financial crisis in 2007, with more landlords planning to sell property than to buy. 

Just under half of landlords say they will not buy any more BTL properties or plan to sell what they have - with 75 per cent of prospective sellers saying their decision was driven by the Chancellor’s tax changes. 

BTL data is six years out of date 

Data about the BTL sector is also open to misinterpretation, it says, and needs to be improved. 

The Council wants the Government to update its Private Landlords Survey, last published in 2010, because the private rented sector has since grown by grown by 20 per cent.

It is now working with the Bank of England to create a clearer picture of BTL business models, which it says is essential before any changes are implemented. 

It has also raised concerns about calculations used by the Treasury because they include other types of lending besides BTL.  

Does buy-to-let really fuel boom and bust? 

Crucially, the Council questions whether BTL really does reinforce the cyclical ‘boom and bust’ nature of the housing market and increases volatility.

It argues that long term investors tend to be the borrowers who draw on growing income and housing equity to finance future borrowing, but says other forces on the market are counter-cyclical.

Because BTL mortgage data before the financial crisis is fragmentary, it is hard to demonstrate precisely how counter-cyclical the market is, but it is true to say BTL activity contracted sharply during the crisis. 

The Council argues this was largely caused by the collapse of global securitisation markets upon which many BTL lenders then relied, but because those lenders now have greater access to stable funding options, another contraction is unlikely to recur.

Because BTL borrowers come in all shapes and sizes (75 per cent rent out one property while 2 per cent own ten dwellings or more) the council warns against a ‘one size fits all’ approach, which will hit some landlords harder than others. 

The proposed rules would limit LTV and interest cover ratios, but the Council argues a more ‘bespoke’ approach is needed.

Regulators should only intervene when there is ‘strong evidence’ that the BTL sector poses specific risks to stability, the Council says. 

It is calling for the FPC to carry out a cost-benefit analysis and a regulatory impact assessment before making any interventions.

The Council, which represents 95 per cent of UK mortgage lending, believes it is right for the FPC to have these powers but says they should only be used with ‘great sensitivity’. 

Figures from the Bank of England released at the beginning of April suggest that demand from BTL landlords have not been curbed by the Stamp Duty hike

Although mortgage lending suffered its first fall in five months during February – from 74,085 in January to 73,871 in March, the dip was much less than economists predicted. 

House prices rose 7.9 per cent in the year to January – the biggest annual increase for 12 months.

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