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PRA’s holiday-let exemption to be short lived, warns adviser

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  • 03/10/2016
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PRA’s holiday-let exemption to be short lived, warns adviser
The Prudential Regulation Authority's (PRA) decision to exclude holiday lets from its recently-published buy-to-let underwriting rules may not be embraced by lenders, warned an industry expert.

The much-anticipated final ruling over how lenders will be forced to assess buy-to-let borrowers’ applications from 1 January 2017, was launched on Thursday.

Under the final rules, all PRA-regulated firms must use an affordability test when assessing a buy-to-let application. A minimum interest coverage ratio test of 5.5% must be used and/or an income affordability test. Holiday lets, however, are exempt from this stipulation.

The PRA’s supervisory statement cited: “An agreement to dwell in a property or part of a property for less than one month is not occupation on the basis of a rental agreement.”

Ying Tan, managing director of The Buy to Let Business, said: “Even though holiday lets are excluded, some lenders may make the decision that they are still buy to let and therefore will put it in with the rest of the underwriting.”

He added lenders will have to take what landlords are saying on face value as there are no formal procedures in place to monitor if residents are occupying the property for longer than a month.

“There will need to be some due diligence checks put in place but ultimately lenders will have to trust what the landlords are saying.”

Tan said due to the small size of the holiday let market, it was unlikely the sector would become a big enough niche to force the PRA to introduce a separate set of underwriting regulations.

“Do lenders really want to have two processes for buy to lets which come under the PRA underwriting and buy to lets that don’t? Chances are they’ll say holiday let or not, it is a buy to let so we will bring it into the regulations,” he added.

David Whittaker, managing director of Mortgages for Business, said he was not surprised holiday lets were excluded from the new underwriting rules.

He said holiday lets were ultimately a business activity and was not convinced that they would be included in the PRA underwriting for buy to lets in the future.

“They are a business. Whether lenders choose to underwrite them [holiday lets] as buy to lets or not is a matter of complete indifference. None of the rules revealed by the PRA were intended to impact holiday lets because they were never in the mix in the first place.

“The market for holiday lets is defined by the location rather than anything else and while you might put pressure on the prices of the properties, running a holiday let is a complicated process,” said Whittaker.

The Bank of England declined to comment on its decision to exclude holiday lets from the PRA underwriting.

Under the new standards a more specialist market is expected, which will drive landlords to set up professional portfolio businesses.

 

Read Hannah Uttley’s guide on what you should know about the PRA’s rules to find out more. 

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