The Bank of England is scrutinising the terms under which mortgages are being granted to buy-to-let landlords for fear they could be more vulnerable than other borrowers to a rise in interest rates.
Outlining its latest set of concerns about the rapidly growing buy-to-let sector, the Bank said it was on the lookout for any relaxation of the lending criteria being offered by mortgage companies, such as reducing the size of deposits or income requirements.
The buy-to-let sector has driven growth in the mortgage market since the 2008 financial crisis and the flow of lending in 2015 is close to its pre-crisis peak. In the first nine months of 2015, buy-to-let lending rose by 10% compared with 0.4% for owner-occupied homes.
The terms of buy-to-let loans are often less stringent than for owner occupiers. Lenders require rental income to exceed 125% of interest payments at a mortgage rate of 5% to 6%. Homeowners are required to meet a higher interest rate test of 7%. The Bank found that if mortgage rates were to increase by three percentage points, nearly 60% of buy-to-let customers would breach the test while only 4% of homeowners would be likely to experience repayment difficulties.
