Bridging boom: How new PRA rules will drive up the market

The Prudential Regulation Authority (PRA) is considering the introduction of tighter rules around affordability testing in the buy-to-let market in an attempt to reduce the operational risk of lenders.

In a consultation paper in March, it said it wants banks to take new tax rules into account when assessing loan applications, perform tougher checks on landlords’ incomes and ensure rental incomes will be enough to cover mortgage interest rates of 2% higher than the interest rate of the mortgage or at least 5.5%.

Specialist lender Regentsmead said the changes would make the buy-to-let process “more cumbersome than it already is”, which, in turn, could give bridging a more prominent role.

“Over the last decade we have seen bridging come from a last resort to a viable alternative and essential tool for landlords and property professionals. As buy to let stalls we may well see the further rise in viability of bridging and the bridging sector,” he added.

Crystal Specialist Finance managing director and Association of Bridging Professionals (AOBP) executive committee member Jo Breeden said he has seen an increase in demand for bridging loans, and expects this to continue until Christmas. He said landlords are seeing a lot of bargains in the market at the moment and using a bridge is the quickest way to snap up the property. The advent of tougher regulation is adding to the desire to buy properties sooner rather than later.

“Whenever there’s any legislative changes there is a rush for applications which builds up,” he added. Breeden said the effect would be similar to pre-March activity when investors tried to beat incoming Stamp Duty changes, which saw a 3% premium introduced on second homes in April. Many investors at the time turned to bridging, he said.

He explained after the changes it would be harder for landlords to get a buy-to-let mortgage, so they will try to remortgage away from the bridge before the new rules are ushered in, but Breeden warned landlords not to cut it too fine.

“Landlords must make sure that they can exit on to a buy-to-let mortgage under the PRA’s new rules. We are discussing this with our borrowers and many are choosing to take lower loan-to-values to avoid getting trapped on the bridge,” said Beeden.

Figures from the Association of Short Term Lenders (ASTL) showed a markedly busier activity in the first three months of this year than in the same period last year, with bridging loans reaching £2.7bn for the whole year.

Although there had been a 9% drop in the value of applications in Q1 2016 compared with the December quarter, this was 10 percentage points less of a drop than in the same period in 2015, when values fell 19%. The first quarter of the year is typically less busy than the “usually frenetic” December quarter, ASTL explained.

Although not yet specified, Breeden suggested the PRA’s rules could come in towards the end of the year, creating a rush in the months leading up to Christmas.