FSA points out opportunities and risks in buy-to-let market

John Tiner said:

Given the benefits of the diversification to lenders and investors of the buy-to-let market it would be inappropriate to caution against such a new business development. It is important, however, that lenders take account of potential affordability problems for the investor borrowing to fund this type of investment, especially in areas of particular risk such as London and the South East, where there is a concentration of the buy-to-let market.

House prices in the London and the South East are highest relative to income and loans have been at the highest income multiples in these areas. This exposes investors to growing risk of market under-performance in these regions.

We would not wish to see, for example, a relaxation of loan to value or rental cover without lenders first making a clear analysis of the risks. In the event of a down-turn in the market, all lenders should be monitoring this part of their portfolio carefully.

John Tiner went on to set out the actions firms need to take in managing their exposure to the mortgage market:

- to ensure business plans take account of the impact of a number of possible future scenarios, such as increasing levels of default.

- to make sure that affordability models review overall income and expenditure of the borrower, taking account of the potential impact of changes in interest rates on all their borrowing; and

- to ensure that firms particularly monitor cases where there is both a high loan-to-value ratio and a high income multiple.

The future prospects of the buy-to-let market are forecast to be positive with economic factors pointing to continued demand in the rental sector. The number of students is increasing and there has been a rise in job mobility.

John Tiner concluded:

Investors are increasingly turning to the buy-to-let market as a source of long-term income and savings, which is an attractive complement to some traditional saving and equity products, especially during a time of low nominal interest rates. Borrowing to fund this investment offers good opportunities to spread investment risk. Investors should be clear-sighted, however, about the long-term nature of this investment and the possible difficulties they may face in cashing in their property investment in the event of a weak market.

Notes for editors

1. John Tiner was speaking at the Council of Mortgage Lenders annual conference in London.

2. CML figures show by the middle of this year alone, 50,000 individuals had invested in the buy-to-let market for the first time. There are currently 130,000 buy-to-let loans outstanding amounting to a value of 10 billion. Three quarters of the buy-to-let borrowers are in southern England.

3. The average income multiples (the number of times a borrowers income that a lender will provide as a mortgage) have continued to increase. At the end of September the average first time buyer multiple was 2.36, compared with the peak of 2.2 in 1989.

4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

5. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.