Mortgages  

PRA on alert over lending multiples and buy-to-let

PRA on alert over lending multiples and buy-to-let

The Prudential Regulation Authority is carefully watching an upward trend in the share of lending at high loan-to-value ratios and high loan-to-income multiples, according to it chief executive Andrew Bailey.

Speaking at the Building Societies Association conference yesterday (20 May), the deputy governor for prudential regulation noted a pick up in lending at higher earnings multiples, although he stressed the surge has not been on the sort of scale that was damaging in the past.

“We are, again, watching this carefully, and it is why in 2010 we implemented the Building Societies Sourcebook to encourage appropriate risk management of lending and funding,” he stated.

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Mr Bailey also said the regulator was monitoring a pick up in activity in buy-to-let lending, which has been bucking wider downward trends in recent months and was the subject of debate in the lead up to the election.

He added he was not seeking to demonise the sector but stated the regulator was again “watching carefully”. He qualified for the societies there is no evidence that BTL loans are of poorer quality than prime owner-occupier and acknowledged there is a “fair amount” of stability.

Elsewhere Mr Bailey praised the building society sector, excluding Nationwide, for contributing 22 per cent of net new mortgage lending in the UK, compared with a 9 per cent share of the stock of lending. However, he also cited risks in the market, highlighting in particular ‘margin pressure’.

“Most forecasters see continued growth in the mortgage market as the most likely development, but at a lesser pace than in recent years, which is consistent with actions taken by the Bank of England last summer to limit the growth of borrowing by highly indebted households.”

Mr Bailey noted growing competition and record lows for two-year fixed rate mortgages, while on the liability side, wholesale funding costs were also low and often below retail funding costs on average, tending to benefit lenders with greater access to funding.

“Therefore, notwithstanding the news on interest margins over the last two years, we are watching this story carefully to see what happens next.”

Of course, increasing pressure on interest margins can tempt lenders to seek higher returns on assets through riskier loans, and to concentrate more on short-term funding, thereby increasing the mismatch.

“We saw this before the financial crisis broke in 2007 as lenders ventured into higher LTV, sub-prime and commercial property lending without having adequate risk management in place,” Mr Bailey noted.

He said that in general since the crisis societies have generally reduced their commercial property loans and non-prime has declined too.

Also announced at the conference was the election of Dick Jenkins, chief executive of Bath Building Society, as deputy chairman of the BSA.

He will take up the post immediately, becoming chairman in November 2015 when David Cutter - current chairman and group chief executive of Skipton Building Society - steps down.

peter.walker@ft.com