The Council of Mortgage Lenders has urged the Prudential Regulation Authority to take into account the wide range of regulatory and fiscal changes already affecting the buy-to-let sector when considering underwriting standards.
In its response to the PRA’s review, the trade body argued its members have progressively tightened lending criteria in response to a range of existing measures, including the introduction of the stamp duty surcharge on additional properties, limits on mortgage interest tax relief and the likelihood that the Financial Policy Committee will be given powers over buy-to-let lending.
The PRA’s consultation began at the end of March - and closed yesterday (29 June) - setting out plans to strengthen underwriting standards for mortgage contracts, including a minimum level of stress testing to ensure loans remain affordable when rates rise.
At that stage the CML and Intermediary Mortgage Lenders Association both stated most lenders were up to scratch and further tinkering with the sector was unnecessary, with the latter’s executive director Peter Williams commenting: “This is critical at a time when BTL is already feeling the full force of regulatory layering.”
In the wake of the UK’s vote to leave the EU, the CML also pointed out lenders will now be busy adjusting plans for an uncertain future, warning any new proposals could affect the buy-to-let sector’s strength and sustainability.
“We also reject the argument that it is only possible to achieve further growth of the buy-to-let sector by relaxing underwriting standards and thereby increasing prudential risks,” read the organisation’s statement.
The CML noted the PRA’s plans would disproportionately affect a small number of firms that lend to high-net worth clients.
“In our view, high-net worth customers should be defined as those with a net annual income of more than £300,000, or assets worth more than £3m, which would mirror the definition applied by the FCA.
“When these customers take out buy-to-let mortgages, their borrowing may be backed by personal guarantees or supported by collateral in addition to the property against which they are borrowing,” the CML’s response stated.
Lenders in this market are also in many instances too small to be significant from a macro-prudential perspective, so the CML suggested lenders which advance less than 100 mortgages a year (on a rolling basis) exclusively to high-net worth clients should be excluded from the proposed regulations.
Islay Robinson, chief executive at high-net worth broker Enness Private Clients, said the CML made a valid point.
“The PRA’s paper suggests lenders apply stronger assessments on personal income when they’re not relying on the rental income to cover the loan.
“In reality, this will only apply to heavily geared landlords or areas where rental yields are typically lower than the property value would otherwise suggest.
“So, in the London market for example, if you’re a HNW landlord, with low personal income but strong assets, the PRA could make it much harder to secure finance.”
In terms of landlords with large portfolios - defined as those with four or more properties funded by a loan - which the regulator views as having a higher rate of arrears than those with fewer properties, the CML responded only a very small proportion of buy-to-let mortgages fall into arrears.
“We would like to see further analysis to understand the nature of any correlation between cases of arrears and the number of properties owned by the landlord,” the submission stated.
On interest rate stress tests, the CML questioned the logic of testing affordability at an arbitrary minimum rate of 5.5 per cent, while addressing affordability assessments it suggested different approaches are the sign of healthy competition and meet the needs of more customers.
“As long as there is no greater risk, the freedom of firms to innovate and to adopt different approaches provides choice – and can make an important contribution to the development of best practice.”
Finally, the CML called on the Bank of England’s regulatory arm to set a clear timetable for implementation of its measures, as lenders will need to make changes to systems, recruit and re-train staff and meet new reporting requirements.
peter.walker@ft.com
