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PRA to impose tougher buy-to-let lending rules

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The Prudential Regulation Authority has confirmed it will bring in tougher underwriting standards for buy-to-let lenders following an earlier consultation.

The PRA consulted on changing buy-to-let underwriting standards in March for all lenders not already subject to FCA regulation.

Today the regulator has published its response to the CP11/16 consultation, as well as its final rules.

The original consultation proposed that lenders should assume a minimum borrower interest rate of 5.5 per cent for the first five years of the loan.

The paper also suggested lenders should consider future interest rate rises for at least the first five years of any buy-to-let mortgage.

The exception would be unless the interest rate is fixed for more than five years, or if the overall mortgage contract is less than five years.

Today the PRA confirmed the 5.5 per cent interest rate figure would apply, and that there will be no link between the figure and the Bank of England base rate.

The regulator also confirmed that rent rises could be included in affordability checks.

The PRA wants lenders to begin bringing in interest cover ratio changes by 1 January 2017, and to begin implementing the remaining changes by 30 September 2017.

The regulator says some firms asked for longer timeframes for these changes, and that any that cannot meet the new deadlines should speak to their supervisor.

The PRA has also rejected industry calls to avoid publishing its final statement on the new underwriting standards until other regulatory changes to buy-to-let bed in.

These changes include stamp duty changes and the impact of the Brexit vote.

The PRA says: “In the PRA’s view, the expectations for minimum underwriting standards included broadly reflect existing practice for most lenders in the market today (with the possible exception of firms’ incorporation of the recent personal tax changes).

“Therefore, the PRA believes that it is appropriate to finalise the standards at this time.”

The PRA has clarified that holiday lets, bridging loans, property investment lending and corporate lending are all exempt from the new underwriting standards.

However, the PRA says it will monitor these sectors “to ensure that prudent underwriting standards are maintained”.

The regulator has also confirmed that a “portfolio landlord” will be any landlord with four or more properties.

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  • Chris Hulme 29th September 2016 at 10:47 am

    We have already seen many lenders increasing the rent to mortgage ratios ahead of the PRA’s expected final rules which read to protect the “Consumer” rather than “Investor” but the rent ratios seem to apply for both Consumer BTL and Investment BTL with lenders being reluctant to differentiate on rent ratios for one or the other client type. Perhaps the corporate exemption will push more borrowers into the Limited Company world – we’re certainly having many more conversations over this subject than previously.

    This dual regulator process with PRA vs FCA in “Non Regulated” products can seem increasingly confusing and bizarre for many market participants….