Preparations to meet the PRA’s new rules on underwriting must begin now – not once those new standards are in place
There is a great deal of speculation at the moment around what Chancellor Philip Hammond’s first Autumn Statement might hold for landlords. One talking point is the unlikely reversal of the pending changes to mortgage interest relief.
But regardless of the outcome on 23 November we need to focus our attention on being prepared for upcoming certainties. Which brings me nicely to the focal point of this article: the Prudential Regulation Authority’s consultation paper on tougher buy-to-let underwriting standards.
The overall aim of the review is to prevent any loosening in the underwriting standards relating to buy-to-let mortgages. The PRA needs to ensure we do not return to the days pre-credit crunch when such standards went out of the window.
On the whole, it is the mainstream lenders that are in the spotlight. SS13/16 confirms the exclusion of the specialist commercial lenders, which are already deemed to have sufficient processes in place.
Come 1 January, the PRA requires buy-to-let lenders to tighten their income cover ratios to take into account borrowers’ increasing tax liabilities and other outgoings. This means the current industry standard of 125 per cent of rental income will be replaced by a higher calculation.
Added to this, lenders will also be required to increase their interest rate affordability stress tests to a minimum of 5.5 per cent, unless the rate is capped for five or more years.
Generally speaking, these changes will not apply to corporate borrowers or personal borrowers remortgaging on a like for like basis. It is those looking to purchase a property or raise capital in a personal name that will be affected. Again, it is clear landlords are being steered towards borrowing via a limited company.
This leaves brokers a small window of opportunity to get cases submitted before the January deadline in order to maximise the amount clients can borrow in their personal names. We have already seen several lenders increase stress tests for personal borrowers from 125 per cent to 145 per cent, so options are becoming fewer and further between the closer to the end of the year we get. The best buys table focuses on products with 125 per cent ICRs.
In addition to this we will see a crackdown on portfolio landlords. From 1 October 2017 they will be required to have a robust underwriting process in place for anyone that falls into this category; the definition of which is a landlord with four or more mortgaged properties.
Lenders will be required to look much more closely at “true” income data for portfolio landlords, which is likely to mean looking back at tax returns for 2014/15 and 2015/16. Remember we have until 31 January to file the latter. Landlords should also be prepared to provide lenders with bank statements, SA302s, rental accounts and potentially income and expenditure statements.
Traditionally, lenders (and thereby brokers) have shown little curiosity about stated rental income matching up to a high degree with what is declared to HM Revenue & Customs. We now need to ensure landlords, lenders and brokers are educated on what will be deemed “acceptable”. This needs to start now, not once the new underwriting standards are in place.
It may just be coincidence that on 21 September this year, HMRC extended indefinitely its Let Property Campaign: the tax amnesty for landlords. But fluke or not, it is surely a sign the ongoing scrutiny of the buy-to-let sector will continue unabated for the foreseeable future.
David Whittaker is chief executive at Mortgages for Business