The Prudential Regulation Authority (PRA) has published its expectations of firms’ underwriting standards to apply to the buy-to-let market, following a review of the buy-to-let market in 2015/2016.
The PRA’s actions are intended to bring all lenders up to prevailing market standards and guard against any slipping of underwriting standards during a period in which firms’ growth plans could be challenged by the changing economic landscape and the impact of forthcoming tax changes.
The PRA’s supervisory statement outlines minimum expectations that firms should meet in underwriting buy-to-let mortgages. For example, affordability assessments should take into account: borrower’s costs including tax liabilities, verified personal income (where used by the lender) and possible future interest rate increases. When setting the expectations for future interest rate increases, the PRA reviewed the prevailing standards in the industry and considered the impact of changes in interest rates, and calibrated the stressed rate accordingly.
In addition, lending to portfolio landlords (defined by the PRA as being those with four or more mortgaged buy-to-let properties) should be assessed using a specialist underwriting process.
The PRA has clarified that the provision in Capital Requirements Regulation (CRR) which reduces the capital requirements on loans to small and medium-sized enterprises by around 25% should not be applied where the purpose of the borrowing is to support buy-to-let business.
- An implementation timeline of 1 January 2017 for the more straightforward changes, and 30 September 2017 for the remainder.
- Allowing firms to assume reasonable rental increases when assessing affordability in the context of possible future mortgage interest rate increases.
- Excluding those re-mortgaging (and not increasing borrowing) from the supervisory statement, in a similar way to residential lending.
- Reflecting the change to mortgage interest tax relief announced by HM Government in 2015, which has already led to several firms increasing their interest cover ratio affordability thresholds. The PRA has reaffirmed its expectation that firms should also take these new costs into account when assessing affordability.
In addition to the supervisory statement, the PRA has issued a policy statement which outlines the responses and any actions taken as a result. The Bank of England has also published an article that provides the details of phase 2 of the loan-level data collection for buy-to-let lending, to be implemented from 2018 Q1 data.
Bob Young, CEO of Fleet Mortgages, said: “While CP11/16 did cause some consternation in the industry, we at Fleet Mortgages are wholly supportive of these measures; indeed, to my mind, it is a positive to see all lenders having to raise standards and to be operating at levels which we believe we’ve been working at since launch. Anyone who has read CP11/16 will have understood this was less a consultation paper, more a statement of intent, and therefore we should not be surprised to see these results. This appears to be one of those rare occasions when we are acting now, rather than waiting until it’s too late – a case of the stable door being shut before the horse has bolted.
“Lenders have already been moving in a number of areas since its initial publication and we can expect those who do not meet these standards to have to move further, and relatively quickly, in the case of interest cover ratio and stress test changes which need to be implemented by the start of next year – the market norm is likely to be circa-5.5% at 145%. The PRA have allowed five-year fixes to remain outside these standards but I suspect if there’s a spike in five-year activity, they’ll move to include it.
“Fleet Mortgages will continue to do what we do; I’ve heard us described as a ‘hybrid’ model which I believe means a combination of individual underwriting on each loan, coupled with the benefits of an automated approach. This appears to be exactly what the PRA and FCA are looking for from buy-to-let lenders – upfront underwriting of cases by experienced professionals which leave brokers and their clients with absolute certainty on the acceptance (or otherwise) of their case within a very short space of time. We are about to launch a revamped product range very shortly which will be very much in keeping with both market and regulatory demands, and will help satisfy growing demand, particularly in the limited company space.”
Peter Williams, executive director of IMLA, added: “IMLA welcomes the decisions published today in the PRA’s expectations for buy-to-let underwriting standards, which are broadly in line with industry’s expectations. They offer a sensible way forward, setting sector wide baselines while at the same time allowing for firm discretion to be exercised.
“We are encouraged that the new standards are to be implemented in a sensibly phased way over the course of the next year. In the interests of a stable market for buy-to-let mortgages and housing overall, this 12 month window should now be allowed to unfold free from additional change and upheaval.
“Some points of contention remain. There will be continuing concerns about the level playing field with firms outside of the PRA regime, though that is now clearly on the agenda of both the FCA and Bank of England. The use of a borrower minimum interest rate of 5.5% will also remain a source of tension, not least if interest rates fall again.
“Since the consultation was first announced, we have seen buy-to-let activity slow considerably – especially in the purchase market – which was entirely predictable following a host of fiscal and regulatory actions affecting landlords. Separate market data from the Bank of England today is also a timely reminder that the post-Brexit landscape remains unclear, with overall mortgage approvals having dipped in August as summer set in.
“The PRA’s goal of making best practice an industry standard for buy-to-let lending and ensuring activity is sustainable remains entirely valid in this new landscape. At the same time, the new housing minister has also made clear that a good, thriving private rental sector remains important to the overall health of the UK’s property market and its ability to satisfy people’s housing needs. Access to mortgage finance is a vital part of this equation and as landlords continue to absorb changes to stamp duty and mortgage interest relief, some breathing space is needed so the market can progress into 2017 and beyond on a secure and stable footing.”