Gavin Elley, consultant mortgage broker explains what all the fuss is about when it comes to increasing stress test calculations for buy to let mortgages.
Stress test calculations are changing because, in short, the Prudential Regulation Authority (PRA), says so.
The PRA is the regulation and supervisory arm of the Bank of England (most mortgage lenders are supervised by the PRA).
The PRA reviewed the lending plans of the top 31 lenders in the industry, which account for over 90% of total buy-to-let lending. It found the following:
- Firms plan to grow their gross buy-to-let lending by, on average, almost 20% per annum over the next two years
- Some lenders are currently applying less rigorous underwriting standards than the market norm
- Affordability of buy-to-let mortgages will be impacted by changes to mortgage interest tax relief for landlords, although only a small number of firms are currently taking this into account in their underwriting assessments.
The review supports the need for microprudential action to safeguard the safety and soundness of lenders, by ensuring prudent underwriting standards in the buy-to-let sector.
So whilst the buy to let market has recovered well since the crash of 2008, there is concern that it is growing too fast in relation to standard residential lending.
The consultation paper outlines minimum expectations that firms should meet when underwriting buy-to-let mortgage contracts:
- Affordability assessment should take into account the borrower’s costs associated with letting the property, including tax liabilities
- If firms (lenders) wish to use the borrower’s personal income to support the mortgage payment, this should be verified
- Affordability assessments should take into account expectations regarding future interest rate increases, subject to a minimum stressed interest rate
- Lending to ‘Portfolio Landlords’ (i.e. those with four or more mortgaged buy-to-let properties) should be assessed using a specialist underwriting process
The proposals seek to ensure that firms conduct their buy-to-let business in a prudent manner.
They aim to prevent a marked loosening in buy to let underwriting standards and to curtail inappropriate lending and the potential for excessive credit losses.
For those that like a little light reading a summary can be found here.
For more information please call my direct line on 01625 416398.
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