Lenders issue bullish response to BTL clampdown

Yesterday, the Bank of England’s regulatory arm laid out its plans to strengthen buy-to-let underwriting standards, including a minimum level of stress testing to ensure loans remain affordable when rates rise.

Sue Anderson, head of member and external relations at the Council of Mortgage Lenders, told FTAdviser the stress-testing requirements - which assume rates 2 per cent higher than current levels, and a minimum threshold stressed rate of 5.5 per cent - appear proportionate and in line with mainstream lender practice.

The consultation also proposed a new definition of ‘portfolio landlord’ - met where they have four or more mortgaged buy-to-let properties across all lenders in aggregate - which the CML stated would need to be assessed in terms of its practical implications.

“This is the latest of a wave of new regulatory and fiscal interventions in the buy-to-let sector that will tend to dampen down both sentiment and the volume of buy-to-let lending,” Ms Anderson cautioned

“But overall we see this specific move largely as a pre-emptive one by the PRA designed to hardwire in good underwriting standards for the future, rather than one specifically designed to change existing current mainstream lending practice.”

Peter Williams, executive director of the Intermediary Mortgage Lenders Association, said most lenders will have little to fear from these proposals, especially given many have already undertaken similar assessments.

“However, it is important these rules do not set minimum standards at a level any higher than is necessary to achieve a sustainable level of activity,” he warned, pointing out that buy-to-let plays a significant role in supporting the private rental sector to meet UK housing demand,” he said.

“The consultation needs to bear in mind their potential effects on the supply of rented property and levels of rent, factors which are oddly excluded from the impact assessment.

“This is critical at a time when BTL is already feeling the full force of regulatory layering, with changes to stamp duty and mortgage tax relief underway and the debate ongoing about the macro-prudential controls which are still to be introduced.”

Mr Williams also cautioned against a ‘one-size-fits-all’ approach, saying it risks dumbing down the market. “To make the proposals practical, the consultation should consider how lenders will need to model landlords’ costs and also how they calculate the level of rent for affordability assessments,” he added.

“We will be reviewing the PRA proposals against our current lending criteria in order to respond to the consultation and understand where any further changes may be required.” Lloyds Banking Group

As for lenders, the Lloyds Banking Group’s mortgage product director Chris Gowland said it is important underwriting for such lending is robust and appropriate, adding in November last year the bank made changes to lending criteria in recognition of this.

“We support the move to ensure a consistent approach is adopted across the buy-to-let industry and we will be reviewing the PRA proposals against our current lending criteria in order to respond to the consultation and understand where any further changes may be required.”

Since November, Lloyds Group’s mortgage borrowers were required to have a monthly rental income of 125 per cent of the mortgage at a rate of 5.49 per cent for loan-to-values over 65 per cent and a rate of 4.99 per cent for LTVs of under 65 per cent.

Foundation Home Loans’ commercial director Simon Bayley suggested much of the issue could be mitigated if more lenders offered longer term fixed rate products.

“It is important to offer the right product for each customer’s circumstances, so as well as offering a 4.39 per cent five-year fixed product, we continue to offer our shorter fixed and tracker products to deliver a strong product selection.”

Most of Home Loans’ products are geared towards fixed rates, he said, while the tracker and variable rate products are more than covered by existing rental cover calculators. “We are very comfortable that our criteria is attractive to borrowers while we continue to be prudent, minimising the risk of over extension in our underwriting.”

Kay Ingram, director of savings and investments at national advisory firm LEBC, added many existing landlords with fixed rate loans will need to review their mortgage options when they mature, or may need to restructure their portfolio of properties and borrowing.

“Stricter lending criteria may mean that getting new mortgage finance may not be as easy as it was when the original loan was taken out. The removal of a standard 10 per cent wear and tear tax allowance and to only get tax relief at basic rate on interest payments will clearly impinge on the affordability criteria.”

peter.walker@ft.com