Three-quarters of buy-to-let landlords foresee no problems in servicing their mortgage payments should mortgage rates increase by 1.5 per cent in the next three years, prompting the Council of Mortgage Lenders to warn the Financial Policy Committee off any macro-prudential intervention.
In its December Financial Stability report, the FPC recognised the possibility of sector disruption, when it expressed concern about what might happen if mortgage rates were considerably higher than today’s prevailing rates.
This followed the HM Treasury publishing a consultation on powers of direction for the FPC in the buy-to-let market.
Bob Pannell, the CML’s chief economist, said the scenario the FPC chose to focus on – the likelihood of landlords’ selling their rental properties in the event of their investments turning sour – “appears a little contrived”.
His position was backed up by the latest buy-to-let survey of nearly 1,000 landlords by YouGov, highlighting the resilience of these investors to interest rates increases.
Respondents were asked how they would cope with a 1.5 per cent rise in mortgage rates over the next three years, which Mr Pannell noted was a “highly plausible scenario” and slightly more adverse than all the paths for interest rates featured in the Bank of England’s recent inflation reports.
Landlords identified a range of strategies for coping with higher mortgage costs, including the positive cash flow that rental payments currently provide and ready access to contingency funds.
Even though the most likely context for higher rates would be a strong jobs market and income growth, only 13 per cent would rely on raising rents.
Mr Pannell noted there are still several tax measures announced in recent months that are likely to have a dampening effect on future growth prospects for buy-to-let, most pressingly the reduction of tax reliefs available to private landlords from 2017 to 2018 onwards and the 3 per cent increase in stamp duty.
The CML’s latest market forecast envisaged house purchase activity by buy-to-let landlords falling away over 2016 and 2017.
Daniel Bailey, owner and mortgage adviser at Middleton Finance, told FTAdviser the landlords he deals with realise that rates are as good as they are likely to see and understand they will be higher by the time their fixed deal comes to an end.
He said: “Many of my landlords have taken advantage of the low rates and opted for a five-year fix deal rather than the more traditional two-year fixed rate.
“Rents are likely to continue growing and therefore will reduce the impact on any rate rises, however even if this is not the case I don’t see my landlords opting out of the market.
“I would envisage more lenders accommodating buy to let mortgages for limited companies and perhaps even offering cashback to offset against the increase in stamp duty.”