The unexpected victims of the coming buy-to-let crunch

For me, the most striking thing I learnt from the Bank of England today wasn’t that the buy-to-let market is looking a little bubbly. I wasn’t surprised that BTL accounts for such a large and growing chunk of mortgage lending, as per this chart:

Nor was it particularly unexpected to learn that the market is now operating at close to its pre-crisis peak levels:

Or that it is expected, based on the current plans of the lenders in the market, to exceed those levels comfortably in the coming years:

No: for me, there were two surprising aspects from today’s Bank of England report on the buy-to-let sector. The first is that so little is known about it in the first place: in order to get to grips with what’s going on in buy-to-let, the Bank had to rely on Council of Mortgage Lenders data and do its own survey work to find out lenders’ practices. Among their findings was this chart, showing that five of the 20 lenders it surveyed did not test how borrowers would cope if interest rates hit 5.5% (a pretty standard test in the world of mortgages).

The second surprise was the Bank’s finding that two-thirds of buy-to-let lenders are lower rate taxpayers, in other words they earn less than £42k a year. In other words, if you were assuming that the typical BTL landlord was a relatively wealthy investor with a bit of extra cash to splash, you’re wrong.

This raises the question: who will be hardest hit if banks start to clamp down on bank lending, making buy to let mortgages that bit more expensive. The answer is not better-off investors, who have more capacity to pay off a chunk of their loans, making them less expensive, but less well-off lower-rate taxpayers, who have less equity and capital to absorb the blow.

In other words, the consequence of what is widely seen as a middle-class tax could well be most painful for the least well off.