If lenders self-regulate they will be better placed to have meaningful discussions with the regulator to influence the level of intervention it believes is required
There has been a lot of negative comment recently regarding the Prudential Regulation Authority’s decision to review buy-to-let underwriting. However, I view it as a timely opportunity for the industry to reflect and consider how it can demonstrate greater collective responsibility and work in closer co-operation with the regulator.
As year-end approaches, and with the rush to complete deals before the stamp duty increase in April, it will be tempting for lenders to start competing more aggressively on criteria as well as price.
But we should be wary of forgetting the lessons of the past and of supporting short-term leverage customers who may find unsustainable as interest rates and the costs of being a landlord rise.
Our data indicates that lending above 75 per cent loan-to-value leads to a significant increase in default rate, so we should be wary of reverting to old lending practices of LTVs in the mid-80s and above.
What is more, while a rental coverage default ‘tipping point’ of 125 per cent is not news, stress rates applied to these calculations will be scrutinised and we should make sure they take account of the impact of recent legislation, especially for non-professional landlords.
We also need to recognise that these recent interventions may not be the last. Added pressure from further unexpected external factors could easily turn profit into loss for landlords if we do not remain prudent.
Even if we believe the market will never return to the levels of stress seen in 2007-09, the PRA will be measuring us against that benchmark and we would do well to take heed.
If lenders self-regulate on key risk indicators (LTV, rental income, pay rate), the industry will be better placed to have meaningful discussions with the regulator to influence the level of intervention it believes is required.
Aidan Brock is chief risk officer of Paratus AMC and Foundation Home Loans