In light of unstable economy
Th EU Referendum in June could push up credit costs & further weaken the sterling, says BoE. Whilst the central bank doesn’t have an official opinion on remain or exit, they’ve hinted, and already taken measures to tighten credit checks on landlords & vary the size of bank’s risk buffers.
Financial outlook worsened
The central bank reported the financial outlook for the UK economy was worse now than when it last communicated in November 2015.
The sterling remains weak against the dollar and a recent further fall marks a seven year low for the UK currency. The EU referendum on 23 June is adding fuel to the fire with markets uncertain of the outcome.
“Heightened and prolonged uncertainty … could lead to a further depreciation of sterling and affect the cost … of financing for a broad range of UK borrowers.” Financial Policy Committee (FPC)
Pro-brexit campaigners accused BoE’s Mark Carney of exaggerating the effects of Brexit, and the central bank remains without an official opinion. Yet actions are already being taken by the bank to protect the financial position of the UK as much as possible during these volatile times.
Tighter credit checks for landlords
The buy-to-let market is now worth over 200 billion pounds after booming in recent years.
The messages portrayed by BoE regarding the economy and fears over Brexit have been heard before over the last few months, however the BoE’s decision to tighten credit checks on landlords was less expected.
The introduction of the Stamp Duty Land Tax (SDLT) surcharge as part of the government’s plans to boost home ownership in the UK, means measures are in progress to dampen the market activity. However, banks still intend to raise lending to landlords by 20 percent a year which was causing concerns with BoE that it may be at the cost of credit standards.
Subsequently, the BoE have issued a recommendation that lenders thoroughly check the income of buy-to-let applications, ensuring the rental income can meet a mortgage rate of at least 5.5 percent.
New tax rules must also be taken into account when assessing a landlord for feasibility.
Whilst most lenders have similar rules in place, enforcing them is expected to reduce the number of buy-to-let mortgage approvals by 10 to 20 percent within three years.
“The measures do not appear to curtail existing market practices” Council for Mortgage Lenders (CML)
Tougher rules may also follow if the Chancellor releases further powers to BoE for buy-to-let lending, as it has already for residential.
The BoE also decided to press forward with a disputed decision to vary the size of banks’ risk buffers over the economic cycle. Whilst the short term impact of both measures are expected to be minimal, they demonstrate policy direction and may be expanded in the future if the central bank decides to.
“While a big symbolic step, there is unlikely to be a large impact,” Simon Wells, HSBC economist