Amidst news of worsening financial stability in the UK, the Prudential Regulation Authority (PRA) has proposed tightening buy-to-let borrowing criteria.
Its suggestions include more in-depth affordability assessments for landlords that could make it harder to take out a buy-to-let mortgage.
The PRA is responsible for supervising lenders
Between December 2015 and March 2016, the PRA reviewed underwriting standards in the buy-to-let market. The 31 firms it assessed account for over 90% of the market. Today, on 29 March, the regulator published its findings.
It has expressed concerns that lenders may relax underwriting standards to meet their buy-to-let growth plans, and has identified “a need for microprudential action”. In the consultation paper Underwriting standards for buy-to-let mortgage contracts, it outlines its proposals.
The Bank of England sees buy to let as a risk
In its December 2015 Financial Stability Report, the Bank of England noted that buy-to-let borrowers may be more sensitive to interest rate movements than owner-occupiers. It suggested that rising interest rates could prompt investors to sell, exacerbating a downturn in house prices and causing more lenders to leave the market.
To safeguard against this, HM Treasury has granted powers to the Financial Policy Committee (FPC) to intervene in the buy-to-let mortgage market. The Treasury is currently deciding how these powers will function.
The outlook for the UK economy “has deteriorated”
Alongside the PRA’s findings, the FPC published the statement from its policy meeting held on 23 March.
It identified that uncertainty around the EU referendum has amplified domestic risk, while prospects for global economic growth are muted. It also discussed perceived risks in the buy-to-let sector, stating that it remained “alert to potential risks”.
It expects that policy measures, such as changes to stamp duty, might dampen buy-to-let activity in the coming months. In the longer term, it believes that the PRA’s proposals will also curtail lending.
An outline of the PRA’s proposals
- Affordability testing: Firms should employ interest coverage ratio (ICR) calculations that account for running costs. If they accept personal income to support applications, they should obtain evidence and take account of credit commitments and essential expenditure.
- Interest rate stress testing: Firms should account for a minimum future increase of 200 basis points when assessing buy-to-let affordability.
- Portfolio landlords: Firms should adopt a specialised underwriting approach for landlords with four or more mortgaged properties. They should take account of the client’s aggregated cash flow and costs, market experience, tax liability and total debt.
- Risk management: Firms should have a framework in place to monitor and limit their specific risk exposure through buy-to-let lending. This could include new fraud controls, limits on geographical and portfolio exposure and ICR/LTV limits.
The above will apply to firms irrespective of whether the client is an individual or a limited company.
The PRA will accept consultation responses until 29 June 2016. See CP11/16: Underwriting standards for buy-to-let mortgage contracts for more information.