The Prudential Regulation Authority has published a consultation on proposals regarding minimum standards firms should meet when underwriting buy-to-let contracts.
The Bank of England’s regulatory arm stated these proposals also include clarification regarding application of the small and medium enterprises (SME) supporting factor on buy-to-let mortgages.
The PRA is aiming “to prevent a marked loosening in buy-to-let underwriting standards and to curtail inappropriate lending and the potential for excessive credit losses” along with enhancing the transparency and consistency of its regulatory approach.
| The paper proposes: |
i) a set of expectations for firms that underwrite UK buy-to-let mortgage contracts where the land is intended to be occupied as a dwelling on the basis of a rental agreement, in pounds sterling, regardless of whether the borrower is an individual or limited company; and |
ii) a clarification in relation to application of the SME supporting factor on buy-to-let mortgages. |
The supervisory statement follows a PRA review of underwriting standards in the buy-to-let sector which covered 31 firms - circa 92 per cent of the market - which highlighted concerns about lenders’ growth plans and how they might meet them.
In particular, it found a risk that firms relax underwriting standards, thus affecting their safety and soundness; suggesting a need for microprudential action.
The consultation closes on 29 June.
The proposals also support the Financial Policy Committee’s ability to act from a macroprudential perspective. A statement from the FPC’s meeting last week made clear it will continue to monitor developments, including the impacts of this initiative and forthcoming tax changes, to assess the implications for financial stability of the buy-to-let mortgage market.
“The FPC remains alert to potential threats to financial stability from rapid growth in buy-to-let mortgage lending,” it stated, noting that the outstanding stock of buy-to-let mortgages has risen by 11.5 per cent in the year to 2015 Q4.
“The macroprudential risks centre on the possibility that buy-to-let investors could behave pro-cyclically, amplifying cycles in the housing market, as well as affecting the resilience of the banking system and its capacity to sustain lending to the wider real economy in a stress.”
In December, HM Treasury published a consultation on the powers that the Bank of England should have over the buy-to-let market, building on 2010 reforms which created the Financial Policy Committee.
In September 2014, the FPC recommended that it be given additional powers of direction over both the residential and buy-to-let mortgage market. In April 2015, the government granted the FPC powers over the residential market and promised to consult on buy-to-let by the end of the year.
The chancellor’s stamp duty surcharge on second-homes, announced at last year’s Autumn Statement and designed to cool the market, has led to a rush to complete deals before the 1 April deadline, further pushing up house prices.
The FPC’s statement last week accepted that growth of buy-to-let lending is likely to slow in the second quarter as changes to stamp duty take effect. “Looking ahead, the combination of forthcoming changes to mortgage interest tax relief and the implementation of the PRA supervisory statement will probably dampen growth of buy-to-let mortgage lending relative to lenders’ plans.”
The most recent figures, from the National Association of Estate Agents, showed that in February, over 85 per cent of estate agents reported an increase in the number of buy-to-let investors flooding the market to beat the stamp duty change.
With added pressure from investors, demand for housing was the highest level for 12 years in February. There were an average 463 house hunters registered per NAEA member branch – the highest since August 2004 when 582 were registered per branch.
peter.walker@ft.com
