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BoE takes aim at credit growth, eying buy-to-let and boosting buffer

Banking Essentials Newsletter December Edition Part 2

Banking Essentials Newsletter - November Edition

University Essentials | COVID-19 Economic Outlook in Banking: Rates and Long-Term Expectations: Q&A with the Experts

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BoE takes aim at credit growth, eying buy-to-let and boosting buffer

TheBank of England onMarch 29 signaled tighter lending standards for buy-to-let mortgages and saidit would begin applying a buffer that banks have to raise against hard times,in widely anticipated moves aimed at restraining credit growth.

Althoughneither measure is likely to do more than slow credit growth, the proposedstandards for buy-to-let loans come as the sector, which has been widely blamedfor fueling house price inflation, also faces an upcoming increase in stampduty. The BoE's Prudential Regulation Authority, which hadpreviously flagged its concerns about mortgage lending to buyers hoping to makemoney out of renting properties, said in a consultation paper that banks shouldexamine would-be investors' ability to cope with mortgage payments wereinterest rates to jump by a minimum 2 percentage points, or to at least 5.5%.

Mid-tierand challenger banks are likely to be most affected by the buy-to-letrestrictions, said Diarmaid Sheridan of Davy, noting that the market is alsoset to be hit by a 3% stamp duty surcharge on transactions, starting April 1.

"Someslowdown in lending was already to be expected," Sheridan said in aninterview.

Sharesin Aldermore GroupPlc, a lender with total assets of £7 billion that specializes inbuy-to-let mortgages, slid more than 2% after the news, before recovering.

Buy-to-letlending has driven growth in mortgage lending since the financial crisis,expanding by 5.9% a year on average since 2008 compared with only 0.3% growthin loans to people buying their own homes, the Bank of England said in itsFinancial Stability Report in December 2015. During this approximate period,U.K. house prices have risen about 30% from their post-crisis trough, accordingto data from Nationwide.

Buy-to-letborrowing has been becoming more popular as home ownership has declined,pushing more people to rent their homes. The FPC said the outstandingstock of buy-to-let loans rose 11.5% in the year to the fourth quarter of 2015.

Buy-to-letaccounted for 15.9% of total mortgage lending in the fourth quarter of 2015, upby 1 percentage point from a year earlier, according to BoE data published inearly March. Gross mortgage lending picked up to £220.08 billion in 2015, froma post-crisis low of £133.81 billion in 2010, according to the Council ofMortgage Lenders.

Somesmaller lenders have loosened loan policies, and buy-to-let investors often faceless stringent affordability tests than other mortgage borrowers, the BoE saidin December 2015. Credit losses from buy-to-let loans have run atabout twice the rate of those to people who have taken out mortgages to buytheir homes, it added.

Totalmortgage arrears fell to 1.45% of all such loans in the fourth quarter of 2015,down from 1.63% a year earlier, according to the March data. 

LargerU.K. banks such as Lloyds BankingGroup Plc, which is the biggest U.K. mortgage lender and aims toexpand mortgage lending by no more than the rate of growth of the overallmarket, are likely to see a less significant effect on their business thanlenders such as Aldermore, Sheridan said.

TheBoE's Financial Policy Committee, meanwhile, said it will impose acountercyclical buffer of 0.5% of risk-weighted assets, up from zero, but onlyas of March 2017. The FPC considers risks to U.K. lenders to be at a normallevel, which should require the buffer to be set at 1%, but it intends to increase itonly gradually. The move will be offset by a reduction in banks'Pillar 2 buffers, which are set on a bank-by-bank basis on top of minimumcapital requirements.

Theincrease in the countercyclical buffer will likely have a muted effect onlending and less than would have been the case with a corresponding increase inthe Bank of England's benchmark policy rate, said Paul Hollingsworth, U.K.economist at Capital Economics.

"Eventuallywhen they move towards 1% there would be some impact, but again I don't thinkit would be especially large," he said in an interview.