New PRA standards will ‘specialise’ the buy-to-let market, industry says

The firms suggested tougher rules published by the Prudential Regulation Authority (PRA) on 29 September will push more landlords to set up professional portfolio businesses while marginal players will start to retreat.

Under new regulation phased in from January, PRA-regulated lenders must use strict affordability tests when assessing buy-to-let applications.

These will take the form of either an interest coverage ratio test or an income affordability test.

Rental incomes will need to be enough to cover mortgage interest rates of at least 5.5% during the first five years of the buy-to-let contract, while affordability tests will take into account the borrower’s personal income to support the mortgage payment as well as tax liabilities and possible interest rate increases.

Portfolio landlords – those with four or more mortgaged buy-to-let properties – will be assessed using a specialist underwriting process.

Industry players welcomed the “more consistent” approach across the market, saying many lenders were already using stricter than required underwriting standards. However, they said the market would become more complex as a result and see smaller landlords retreat.

“By requiring a more consistent approach across the market, the PRA should be able to ensure that the strong credit performance of buy-to-let lending is maintained and that lending remains sustainable,” said Paragon Mortgages managing director John Heron.

“We would however, expect these measures to restrict the level of growth in the buy-to-let market going forward, by cutting out more marginal business. We also expect a larger proportion of the market to be specialist in nature, consisting of more professional portfolio landlord business,” he added.

Similarly, Mortgages for Business managing director David Whittaker, said: “The changes are likely to encourage more buy-to-let borrowers to move to a limited company model for buy-to-let investment.”

He said some investors may find the new market tricky to navigate. “From now on lenders and brokers will really have to ensure that they are educating landlords not only on the impact of stress tests but also the additional underwriting requirements that will bite on 30 September 2017,” Whittaker said.

On top of the new stress tests, BTL landlords saw their Stamp Duty hiked 3% on second homes earlier in the year and are facing further tax relief cuts from April 2017.

Executive director of lender trade body the Intermediary Mortgage Lenders Association (IMLA), Peter Williams, who welcomed the PRA changes, therefore cautioned against any further tinkering with the market.

He said: “Since the consultation was first announced, we have seen BTL activity slow considerably – especially in the purchase market – which was entirely predictable following a host of fiscal and regulatory actions affecting landlords.

“Access to mortgage finance is a vital part of [a healthy housing market] and as landlords continue to absorb changes to stamp duty and mortgage interest relief, some breathing space is needed so the market can progress into 2017 and beyond on a secure and stable footing.”

Fleet Mortgages chief executive Bob Young, added: “Anyone who has read CP11/16 will have understood this was less a consultation paper, more a statement of intent, and therefore we should not be surprised to see these results. This appears to be one of those rare occasions when we are acting now, rather than waiting until it’s too late – a case of the stable door being shut before the horse has bolted.”