The future for buy-to-let mortgage landlord applicants could get a lot tougher in the coming weeks, as new Prudential Regulation Authority (PRA) rules around lending money come into effect.
After a period of industry silence, in late August, the National Landlords Association (NLA) broke cover by urging buy-to-let landlords to consider remortgaging ahead of potentially tougher lending conditions from September 30th. The NLA’s rallying call comes ahead of the second phase of PRA rules which are set to make it more expensive for lenders to offer buy-to-let mortgage loans to borrowers.
The context of these changes comes from a piece of banking regulation which was introduced to support Small to Medium Enterprises (SMEs) in the wake of the financial crisis. The legislation came in the form of the Capital Requirements Regulation of the Basel III banking regulation.
Basel III was introduced to help enhance banking systems and develop more robust banks by tightening lending rules in the wake of the financial crisis of 2008. However, the new framework would have made it harder for SMEs to obtain credit – and these businesses were deemed an important contributor to regenerating economies. Therefore, Basel III introduced special consideration for SMEs called ‘supporting factors’, which was applied to their loan applications, lowering the levels of capital a lender needed to approve an SME loan. Buy-to-let landlords qualified for this special consideration until the PRA made known its plans in 2016.
PRA plans
In March 2016, the Bank of England’s PRA launched Consultation Paper CP11/16, titled ‘Underwriting standards for buy-to-let mortgage contracts’, along with a policy statement which announced: “The SME supporting factor should not be applied where the purpose of the borrowing is to support buy-to-let business. The PRA would expect firms to comply with the spirit and intent of this statement.”
The supervisory statement followed a PRA review of the buy-to-let sector which highlighted concerns about lenders’ growth plans and how they might meet them. In particular, the PRA was concerned about the risk that firms might relax their underwriting standards and potentially compromise their safety and soundness.
Buy-to-let finance
The PRA anticipated that this new ruling would likely to have a significant impact on the buy-to-let market, stating: “The buy-to-let market is expected to continue growing after the implementation of the proposals set out in the CP. However, when compared with the baseline absent of the proposals, it is estimated that the proposals will lead to a decrease in the number of cumulative new approvals for buy-to-let mortgages by about 10-20% by Q3 2018 and, correspondingly, a lower value of the stock of buy-to-let mortgages.
“Any reduction in buy-to-let activity and lower buy-to-let mortgage stock will lead to a reduction in short-term revenues for lenders and mortgage brokers. While affected firms may be able to recover some of the reduction in revenues by lending to owner-occupiers or other business activities in the economy, we think some more affected firms may find it difficult to recover lost revenues. Some buy-to-let investors could see an impact on their ability to obtain a buy-to-let mortgage and/or the profitability of their lending activities due to higher deposit requirements.”
The impact of this particular change had been greeted with a muted silence from the industry, until the NLA made its announcement on August 22nd.
Landlords hit
However, the NLA’s most recent Quarterly Landlord Panel indicates that conditions have already become tougher, with 43% of landlords saying the process of obtaining finance has become more difficult since the beginning of 2017.
Additionally, 53% of landlords said they have been required to provide additional evidence to support recent mortgage applications, including their tax returns, cashflow forecasts and business plans.
Commenting on the findings, Chris Norris, head of policy at the NLA, said: “Since the PRA regulations were introduced in January, the marketplace is looking considerably more complex. It was always likely that lenders would start to demand more evidence from applicants, and landlords are already feeling they have to go further to prove that they can afford finance.
“Changes to buy-to-let taxation will eat away at many landlords’ profits and make it more challenging for them to manage their businesses. As a result, many are looking to limit their exposure to the changes, which is why we’ve seen a rise in remortgaging.
“However, the situation is due to worsen from September and, while it may not be financially advantageous for everyone, if you’re considering remortgaging or expanding your portfolio then do so now to avoid any further difficulties.”
Commercial Trust has been aware of the issues surrounding the second phase of PRA Regulation in September and earlier this year looked at the background to these changes in its report: PRA deadline for portfolio landlords and lending changes. The introduction of the second phase of PRA changes on September 30th could have widespread implications for future lending levels for buy-to-let landlords.
It is interesting to see how the lending environment is perhaps already becoming stricter and this may well be the shape of things to come, as the NLA has eluded to. We could potentially see a spike in the number of remortgage enquiries in the coming weeks, as people look to act before lending gets tougher.
Certainly in some circumstances remortgaging ahead of the changes might be an option to landlords, depending on personal circumstances. However, remortgaging will take a lot into account and I recommend that anyone thinking of doing so speaks to an expert first.
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