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Obstacles to overcome for challenger banks in BTL market

by: Edward Murray
  • 05/05/2016
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Obstacles to overcome for challenger banks in BTL market
Profitability and arrears rates are under pressure in the challenger bank sector following the introduction of changes to the buy-to-let income tax regime.

The warning came in a report published by KPMG this week entitled: A new landscape, Challenger banking annual results. The report highlighted the fact that the buy-to-let sector is a major market for these banks, accounting for around 15% of their balance sheets.

The roll out of restrictions on income tax relief that begin in April 2017 and due to be completed in 2021, will impact profitability for higher and additional rate landlords who have leveraged their investments.

Landlords in this position would either have to accept short-term losses for potential capital gains in the future, increase rents, or sell their properties. The report said: “The challenger banks will need to watch the first option carefully to ensure that it doesn’t impact significantly on arrears rates.”

The silver lining on the new income tax relief restrictions is that they do not apply to limited companies. KPMG said this was an area that challenger banks needed to explore in full: “There is therefore an opportunity to attract buy-to-let business by adopting a flexible approach to lending to corporates or to those looking to transition to a corporate structure. This is an opportunity that the nimble challengers should be well placed to exploit.”

Looking to the horizon, KPMG said the Basel Committee’s consultation on the amount of capital that needs to be held in respect of buy-to-let lending may also impact the market, as could the Prudential Regulatory Authority’s (PRA) consultation.

The report stated: “On 29 March 2016, the PRA released for consultation proposals on updated underwriting standards for buy-to-let contracts, which it estimates would reduce the number of cumulative new approvals for buy-to-let mortgages by about 10–20% by Q3 2018. We anticipate that this reduction would occur at the racier end of the market, largely unserved by the challengers, who may already meet the majority of the revised underwriting requirements. However, lending may be restricted at the margins.”

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