PRA recommends tighter underwriting for BTL underwriting

The Prudential Regulation Authority’s Financial Policy Committee published a consultation paper seeking to “prevent a marked loosening of buy-to-let underwriting standards and to curtail inappropriate lending and the potential for excessive credit losses”.

The proposals are expected to lead to a fall in new BTL approvals by about 10-20% by Q3 2018 - which will lower value of the stock of buy to let mortgages.

The consultation paper proposes the introduction of a set of measures that firms should meet when underwriting BTL mortgages including affordability testing and interest rate affordability stress testing.

The PRA is also looking to establish a universal definition of a ‘portfolio landlord’, suggesting that any landlord with four or more mortgaged BTL properties would fall into this category.

Adrian Anderson, director of mortgage broker Anderson Harris, added:

"It is crucial that lenders assess the affordability of anyone applying for a buy-to-let mortgage, just as they do with residential deals. Currently, most of the focus is on the property and anticipated rental income but lenders are starting to view the applicant more closely, considering their personal income and whether they have any cash or other investments that could be liquidated.

"It is encouraging that existing landlords and their investments will not be unfairly hit by any proposed changes. The proposals will not apply to those remortgaging existing buy-to-lets as long as landlords do not want to take on any extra borrowing. It is likely that many will stick with their existing investments and not add to them, unless the argument for doing so is truly compelling.

"We don’t expect a mass exodus from buy-to-let but whether it will be such an attractive investment in the future for new landlords remains to be seen. It will certainly be harder to get a buy-to-let mortgage and while the Bank of England is not imposing a maximum loan-to-value cap, there will be a downwards pressure on LTVs, making buy-to-let the preserve of wealthier landlords."