The Prudential Regulation Authority (PRA) has published proposals which could lead to a significant decrease in the number of buy-to-letapprovals being granted over the coming years. In fact, the authority estimates that mortgage approvals for buy-to-let investments could plummet by between 10% and 20% by the end of 2018.
New standards were drafted by the PRA following a review which brought about the conclusion that the buy-to-let lending industry is currently practicing with excessively relaxed underwriting standards, which is in turn having an impact on safety and fairness. According to a statement released by the PRA, the new proposals represent an immediate and concerted efforts to prevent underwriting standards in buy-to-let lending becoming any looser, for the primary purpose of eliminating unfair/inappropriate lending and minimising potential losses.
The PRA acknowledges the fact that many buy-to-let investors may find themselves losing out by both facing a reduction in profitability and an increase in the difficulty of obtaining the necessaryin the first place. Nevertheless, the authority stated that those affected may in most instances be able to recoup such losses in other areas.
One of the key changes the PRA is gunning for is something of an assumed increase in interest rates over the period of the loan, which should influence affordability of the loan. The authority wants to impose an affordability test or ICR test to be brought in as standard for those looking to take out a buy-to-let contract.
“Even if the interest rate determined above indicates that the borrower’s interest rate will be less than 5.5% during the first 5 years of the buy-to-let mortgage contract, the firm should assume a minimum borrower interest rate of 5.5%,” read an extract of the statement from the PRA.
In addition to stricter rules and regulations on lending, the PRA wants to set a new standard as to exactly what defines a portfolio landlord, as opposed to a standard buy-to-let landlord. In their view, any landlord with at least four buy- to-let would be considered a portfolio landlord. In instances when buy-to-let mortgage applications are to be considered for portfolio landlords, the underwriting process tends to be considerably more complicated and warrants closer scrutiny, the authority states.
Unsurprisingly, the proposal already has a great many high-profile critics and the backlash is expected to be both heated and on-going.
“This is a classic case of slamming the stable door after the horse has bolted,” commented former RICS chairman, Jeremy Leaf.
“The changes the Chancellor has made to mortgage interest tax relief and higher stamp duty for landlords will have enough of an impact on buy-to-let without the need for further interference from the Bank of England. Landlords will already be put off investing further unless the numbers add up and this is a case of kicking them when they are down,”
“The Bank of England should have waited to see what impact the changes that have already been made have on the market before making further tweaks. The combined impact of all these measures will be to cut supply and increase the upward pressure on rents. A number of landlords will already have been tempted to sell before this latest round of proposed changes to the sector.”