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Bank of England to consult on buy-to-let ‘prudence’

Bank of England imageThe Bank of England has published a consultation paper (CP) which seeks views on its proposals which could result in strict limitations for buy-to-let mortgages.

David Smith, RLA, imageDavid Smith (left), the Residential Landlords Association’s Policy Director said, “The Bank needs to be careful that it does not over-react to the current surge in buy to let applications which are aiming to beat the tax increases coming in April.

‘These include a three percentage points extra levy on stamp duty and abolition of mortgage interest relief. It is likely that the impact of these will significantly reduce the demand for borrowing.

“We would urge the Bank to tread carefully and avoid any premature moves that could stifle the supply of the 1 million rental properties the country desperately needs.”

The consultation paper says:

Underwriting standards for buy-to-let mortgage contracts – CP11/16
​Background

This consultation paper (CP) seeks views on a supervisory statement which sets out the Prudential Regulation Authority’s (PRA’s) proposals regarding its expectations of minimum standards that firms should meet when underwriting buy-to-let mortgage contracts. The proposals also include clarification regarding application of the small and medium enterprises (SME) supporting factor on buy-to-let mortgages.

Summary of proposals
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.

The proposals to clarify expectations in relation to application of the SME supporting factor are aimed at enhancing the transparency and consistency of the PRA’s regulatory approach.

The proposals also support the Financial Policy Committee’s ability to act from a macroprudential perspective.

The proposals are relevant to PRA-regulated firms that undertake buy-to-let lending that is not already subject to FCA regulation. The clarification regarding the SME supporting factor is relevant for firms bound by the Capital Requirements Regulation (575/2013) (CRR).

The CP proposes:
i) a set of expectations for firms that underwrite UK buy-to-let mortgage contracts where the land is intended to be occupied as a dwelling on the basis of a rental agreement, in pounds sterling, regardless of whether the borrower is an individual or limited company; and

ii) a clarification in relation to application of the SME supporting factor on buy-to-let mortgages.

Chapter 2 outlines the PRA’s proposals. Chapter 3 considers the PRA’s statutory obligations in relation to the proposals. Appendix 1 details the draft supervisory statement.

The supervisory statement follows a PRA review of underwriting standards in the buy-to-let sector which covered 31 firms (c.92% of the market). This review highlighted concerns about lenders’ growth plans and how they might meet them. In particular, there is a risk that firms relax underwriting standards, thus affecting their safety and soundness. The findings suggested a need for microprudential action.

Responses
This consultation closes on Wednesday 29 June 2016. Please address any comments or enquiries to CP11_16@bankofengland.co.uk.

You can download the full paper here: http://www.bankofengland.co.uk/pra/Pages/publications/cp/2016/cp1116.aspx

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