View more on these topics

Editor’s note: Is MMR for the buy-to-let market on its way?

Estate-Agent-To-Let-Buy-Sign-700.jpg

The Prudential Regulation Authority’s consultation on underwriting standards is fraught with risks

Policymaker intervention in the buy-to-let market took on a new dimension last week with the publication of the Prudential Regulation Authority’s consultation on underwriting standards.

Essentially, the PRA wants to introduce a minimum set of underwriting standards for buy-to-let lenders to ensure they lend in a “prudent manner”. It wants lenders to take into consideration future interest rate rises for a minimum period of five years from the loan’s start date.

The PRA proposes that lenders stress test by taking into account market expectations, a minimum increase of 2 percentage points in buy-to-let interest rates and any prevailing recommendation from the Financial Policy Committee regarding appropriate stress tests. Further, it wants lenders to assume a minimum borrower interest rate of 5.5 per cent during the first five years.

The PRA also proposes that all firms use an affordability test when
assessing a buy-to-let contract in the form of an interest coverage ratio test and/or an income affordability test. This element should hold few worries for lenders because many already employ these methods.

The final strand of the consultation concerns portfolio landlords, which the regulator is intent on labeling as those with four or more properties. In addition to this, it is seeking to ensure lenders use specialist underwriting processes that account for the complex nature of these transactions.

While one cannot argue with the intention behind the PRA’s actions, there are undoubtedly risks when introducing minimum requirements for any market.

First, those minimum standards must not be set so high that they choke the market and deter landlords from investing because, ultimately, tenants will pay the biggest price in this scenario.

Then there is the effect on competition and choice. Competition in the buy-to-let sector is very strong at present, with a healthy range of options on offer to borrowers. However, introducing a uniform approach risks holding back innovation – ironic at a time when the FCA is investigating barriers to competition in the mortgage market.

This consultation is not the buy-to-let sector’s equivalent of the Mortgage Market Review, but it hints that the political will is there and it is surely now one step closer.

Recommended

Estate-Agent-To-Let-Buy-Sign-700.jpg

‘Tough B2L underwriting rules needed to keep lenders in check’

Buy-to-let experts agree with the Prudential Regulation Authority that a minimum set of underwriting standards are needed to keep lenders in check. The proposals are laid out in a consultation paper on buy-to-let, published this morning. The paper includes suggestions for a minimum level of stress testing and new definitions and rules for portfolio landlords, […]

UK-Currency-Money-Coins-700.jpg
2

How would a Brexit affect the mortgage market?

A Brexit from the European Union is unlikely to hit the UK mortgage market hard, according to economists and trade bodies. A vote on whether the UK stays in the EU will be held on 23 June, Prime Minister David Cameron announced last weekend. Cameron wants the UK to remain part of Europe, but London […]

Andrew-Bailey-Conference-Alt-2013-700x450.jpg
1

PRA boss warns housing crash would hit retirement savings

PRA chief executive and incoming FCA boss Andrew Bailey has warned savers investing in property to fund their retirement could be at risk if house prices slump. Yesterday, the PRA proposed new minimum underwriting standards for the buy-to-let sector, arguing that the market is defined by short-term interest-only mortgages that leave consumers vulnerable to hikes […]