BTL lenders to have underwriting reviewed by the PRA

It was announced in the Financial Stability Report (see below) that the Prudential Regulation Authority (PRA) will review the underwriting standards and procedures of Buy to Let lenders.

The Chancellor George Osborne has also given the Financial Policy Committee powers to add lending caps on the BTL sector with further details to be decided in a forthcoming consultation.

Mark Carney, Governor of the Bank of England said “the review of underwriting standards was to ensure there was not a shift from responsible to reckless.

The FPC welcomes the PRA’s intention to review underwriting standards amongst Buy to Let lenders and we take note of recently announced tax changes that will affect this sector. The FPC will monitor developments in Buy to Let activity closely.”

Financial Stability Report Buy to Let Sector Executive Summary:

The buy-to-let sector continues to drive growth in the UK mortgage market. Since 2008, the outstanding stock of buy-to-let lending has grown by 5.9% per annum on average, compared with only 0.3% growth in the stock of lending to owner-occupiers. In the year to 2015 Q3, the stock of buy-to-let lending rose by 10%. Greater competition in this
sector has not to date led to a widespread deterioration in underwriting standards of UK banks. But some smaller lenders have loosened their lending policies, for example by raising their maximum LTV thresholds. Strong growth in buy-to-let lending is driven in part by a structural shift in tenure to the private rental sector. But it may have implications for financial stability.

New loans to buy-to-let investors are often subject to less stringent affordability tests than loans to owner-occupiers. Assessed against relevant affordability metrics, buy-to-let
borrowers may be more vulnerable to an unexpected rise in interest rates or a fall in income, which could exacerbate the scale of a fall in house prices. During an upswing in house prices, investors seeking capital gain can increase leverage including through the purchase of multiple properties. The resulting boost in demand can add further pressure to house prices, prompting both buy-to-let and owner-occupier borrowers to take on larger loans, thereby increasing indebtedness. Since 2010, credit loss rates incurred on
buy-to-let loans in the United Kingdom have been around twice those incurred on lending to owner-occupiers.

The FPC remains alert to financial stability risks arising from rapid growth in buy-to-let mortgage lending and notes the difference in underwriting standards in the owner-occupier and buy-to-let mortgage markets, in particular in the typical interest rates used in affordability stress tests. The FPC will monitor developments in buy-to-let activity closely following the tax changes to the buy-to-let market announced by the Chancellor in the Budget and Autumn Statement. It supports the programme of work initiated by the Prudential Regulation Authority to review lenders’ underwriting standards.
HM Treasury is planning to launch this year a consultation on giving to the FPC similar powers of Direction on buy-to-let mortgage lending as those it has already provided on
owner-occupier mortgage lending. In the interim, the FPC stands ready to take action if necessary to protect and enhance financial stability, using its powers of Recommendation.

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