PRA reviewing use of five-year fixes in portfolio lending

Shawbrook Commercial Property managing director Karen Bennett revealed the ongoing process as part of a wide-ranging interview with Specialist Lending Solutions covering the investor mortgage market.

Bennett also noted the lender was seeing investors begin the transition process from individual to limited company operations and she added some lenders could be significantly affected by the incoming houses of multiple occupation (HMO) rules.

PRA audits and visits

Bennett highlighted that the apparent exemption applied to landlords taking out five-year fixes was now being reviewed by the regulator as part of its audit process.

“The rules the PRA has put out are around protecting individuals and making sure lenders are assessing their situation as consumers,” she said.

“Now these are investors, but they are still consumers, and so we need to make sure we’ve done the right considerations for the customer.

“So it’s been a few months since the standards came in, (in October 2017) and the PRA is going around doing its audits and visits and it will be very interesting to see what their view is with regards to five-year fixes.

“The regulator hasn’t started discussing them, they are just trying to understand what else they think could be done within that market, where those sensitivities are,” she added.

Creating challenges

As part of this affordability process, Bennett acknowledged that lenders have a careful line to walk with these customers to avoid creating mortgage prisoners in five years’ time.

“If it’s like-for-like finance then you can be pragmatic, but you’re going to want balance and if you know someone is stretched then you’re not going to want to take that customer on,” she said.

“It is creating some challenges, but it’s about making sure we understand the real issue is, and that’s mostly around individuals, rather than limited companies.”

Those on lower rate tax levels should see a lower impact, but Bennett noted that the specific risks need to be understood to see if “tighter controls can be brought into that area”.

You have to live on your salary

One development of ensuring landlords do not overleverage themselves has been the growth of top slicing mortgages that include personal income.

Shawbrook does not lend above 75% loan-to-value (LTV) but Bennett explains doing so now in general is much trickier, particularly on variable rate deals.

And the bank, along with stressing the portfolio, considers any other commercial and residential securities the borrower may have and whether these may come as potential liabilities or incomes.

“The nervousness is that while an outside income can be taken into account on your first deal, by the time you’re on your sixth deal using the same £25,000 salary as your hedge, you haven’t really got a hedge,” she said.

“We need to decide what our risk appetite is and the best outcome for the customer. Then when they come back in a year’s time we know we’ve lent to them in the right way and extending that next offer is relatively easy to do.”

Turbulent six months

It’s fair to say the last few months have been turbulent for Shawbrook in its residential operation, with issues raised by the regulator and its second charge lending.

Bennett’s oversight encompasses the commercial buy-to-let and bridging lending arms and she has seen little spill over from the residential operation.

“We don’t have a lot of broker crossover because they are both very specialist markets,” she said. “Brokers judge people based on their performance and their delivery and I think the brokers we’ve dealt with know we focus very heavily on doing the right thing for the customer and them.

“So, we haven’t had too many issues other than the usual troubleshooting of cases,” she added.

Brokers working harder

Overall, Bennett agrees it has become a more specialist market for broker and investor alike.

That is now being reflected as more borrowers begin the process of moving their assets from personal name to Limited Liability Partnership (LLP) and then limited company.

She is keen to highlight the importance of this middle step to LLP, one which can go overlooked, and which could cause problems with HMRC if not conducted correctly.

As ever, the recommendation to investors is to ensure they receive appropriate tax advice before making any moves.

And all this means brokers are having to work much harder as cases become more complicated and as clients need to be educated about the changes.

“Brokers are delivering the same numbers but it takes a lot more effort to get the same business through,” she explained.

“They are spending a lot more time trying to help investors build their strategies out further, for example taking them over six years instead of four to avoid leveraging up to 85%,” she added.

Big players succeeding

Another trend is with the slowing down of the high-end market, those properties valued at £1.5m or more, has meant larger, wealthier investors are able to take advantage.

“They are doing so because they are in the position to negotiate and get some nice prices as they are generally geared a lot lower,” she said.

“They have more cash in deals and are able to go out and be cheeky.

“But we’re not seeing dramatic falls in values paid, just seeing more deals being done,” she added.

HMO caution

And Bennett concluded with a further cautionary message regarding the impending changes to HMOs which have now been pushed back to October.

These will see, among other changes, more restrictions applying to properties with fewer than six residents.

“The lenders that lend based on single dwelling value on these properties will need to look at their strategy to see if it’s something they can continue doing going forward,” she said.

“They could end up with some challenges within their book that we wouldn’t have,” she added.