The PRA said that given the inherently complex nature of lending to portfolio investors, lenders should adopt a specialist underwriting approach for these landlords.
In its consultation paper, Underwriting standards for buy-to-let mortgage contracts, the PRA said it intends to establish a guardrail on underwriting standards in the buy-to-let sector to prevent these from slipping in the future.
The regulator reviewed the lending plans of the top 31 lenders in the sector which account for over 90% of total buy-to-let lending. These firms plan to grow their gross lending by an average of almost 20% annually over the next two years.
For portfolio landlords, lenders will be expected to assess the borrower’s experience in the market including their full portfolio of properties and any outstanding mortgages, the assets and liabilities of the borrower and the merits of any new lending in the context of the investor’s existing portfolio. Portfolio landlords are estimated to make up 6-8% of all buy-to-let investors.
The PRA named costs arising from multiple tenancies and potential risks of property and geographical concentrations as some of the more complex characteristics of portfolio buy-to-let lending.
The paper also sets out expectations for affordability testing across the wider buy-to-let market, proposing that firms use an interest coverage ratio test and/or income affordability test when assessing buy-to-let applicants.
Considerations that the PRA will require lenders to think about when underwriting buy-to-let deals include taking into account the borrower’s costs associated with letting the property, verification of personal income and factoring in future interest rate increases into affordability tests.
The Bank of England will begin correspondence with lenders with immediate effect with responses to the consultation paper requested by 29 June. Lenders will then have around a month to implement the PRA’s requirements.