The Bank of England has questioned big UK lenders about buy-to-let loans, which they have interpreted as a signal to rein in their mortgages for landlords.
Supervisors from the central bank’s Prudential Regulation Authority have visited lenders in the past two weeks to express concern over the buy-to-let market, according to sources at three institutions.
This was despite tax changes introduced earlier this year to cool the market and efforts by regulators to insist banks “stress test” landlords’ ability to repay mortgages, which have already caused a sharp slowdown in lending.
While the PRA did not tell banks to stop extending buy-to-let loans, banks have interpreted supervisors’ raised eyebrows in this way, they told the Financial Times. “The message was clear — we think you have enough buy-to-let loans,” said one.
The PRA declined to comment.
The buy-to-let market has been on the BoE’s radar for some time. Earlier this month the government gave the BoE an official “power of direction”, which enables it to order the PRA or Financial Conduct Authority to demand lenders limit buy-to-let mortgages. The government’s move essentially formalised powers the BoE already had to suggest such a move.
Regardless of the PRA’s concerns, the buy-to-let market was showing signs of cooling because of stamp-duty changes for second homes introduced in April, and tougher underwriting standards for banks. While those standards do not come into effect until January, banks have been tightening their lending criteria in anticipation of the changes.
Average monthly buy-to-let mortgage lending was down a third in the six months since April, compared with the six months before April, according to the Council of Mortgage Lenders.
One senior UK banker said the BoE was “concerned” about aggressive lending practices at some banks. But large mortgage lenders, such as Lloyds Banking Group and Royal Bank of Scotland, have already restricted their risk appetite in this area.
The BoE’s latest snapshot of the buy-to-let market is expected to come on Wednesday, when it publishes its next Financial Stability Report along with the unveiling of this year’s stress-test results.
The PRA has examined the UK’s top seven banks’ balance sheets under various doomsday shock scenarios — even though real-life events such as the Brexit referendum and the US election this year have caused foreign-exchange swings that go further than the ones envisaged by the stress test.
Unlike previous years, each bank will have its own threshold to clear to “pass” the tests.
“Also for the first time they are testing both severe domestic and international scenarios, whereas previous years have focused on one or the other,” said Steven Hall, a KPMG partner. “The impact of conduct risk is expected to weigh heavy on this year’s results as we saw with the 2015 exercise and the European Banking Authority’s July results.”
RBS was particularly badly hit by the EBA’s stress tests published in July, in part because of the likely multibillion pound cost of settling a US investigation into alleged mis-selling of mortgage securities before the 2008 crisis.
Additional reporting by Judith Evans