The consultation paper, CP11/16, ‘seeks to ensure that firms conduct their buy-to-let business in a prudent manner’, according to its summary of proposals, and aims to ‘prevent a marked loosening in buy-to-let underwriting standards and to curtail inappropriate lending and the potential for excess credit losses.’
Alan Cleary (pictured), managing director of Precise Mortgages, highlighted the need for bridging brokers to be aware of the paper, in order to correctly advise their customers.
“Bridging lending has been growing strongly for several years and this growth has a strong correlation with the growth we have seen in the buy-to-let market,” said Cleary.
“Many bridging loans are for properties destined for the buy-to-let market but probably require some work before they qualify for a longer term buy-to-let mortgage.
“For this type of bridging loan, lenders and brokers will be assessing the exit based on the potential to get a buy-to-let loan and, when times are good, this should be fairly straightforward, but can be more tricky dependent on prevailing market conditions.”
Based on the stipulations set out in the paper, affordability testing should give consideration to all costs associated with renting out the property that the landlord is responsible for and any tax liability associated with it.
“Lenders can take account of the borrower’s personal income when assessing affordability – this is subject to the same regulations as residential lending in terms of income validation, expenditure data and credit commitments,” said Cleary.
“The PRA does not expect lenders to reduce the minimum interest coverage ratio (ICR) requirement below 125%.”
With regards to interest rate stress testing, the document rules that firms must incorporate a minimum of a 2% stress on either the initial or reversion rate, subject to a minimum rate of 5.5% being used, Cleary explained. However, fixed rate products of five years or longer do not require a stress rate to be applied.
A specialist documented underwriting process is required for lending to portfolio landlords, which the government has defined as those with four or more mortgaged properties.
“To the extent these changes soften the growth in the buy-to-let market, or even contract it in the short term, it will have an impact on the bridging market”, said Cleary.
“As this is at consultation stage there is the possibility that some of these points will change and the likely implementation date is early 2017,” he added.