The PRA has unveiled plans to shrink buy-to-let mortgage approvals by 10-20% to curtail risky lending.
The PRA has unveiled plans to shrink buy-to-let mortgage approvals by 10-20% by Q3 2018 to curtail risky lending.
In its consultation paper the PRA ruled that buy-to-let lenders must stress test loans for five years or against a rate of at least 5.5%.
Because of its changes the authority noted that buy-to-let activity and stock will reduce, affecting short-term revenues for lenders and mortgage brokers.
It said this will result in approvals being 10-20% lower than it if hadn’t got involved by the third quarter of 2018.
In its paper the PRA said: “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. “
The PRA accused the market of being sensitive to interest rate rises due to the number of short-term interest-only loans in the sector.
It therefore proposed that firms stress test affordability by pricing in a minimum interest rate rise of 2% over five years or stress testing against a rate of at least 5.5%.
It said this won’t apply to loans that are fixed for five years or more or if the mortgage contract lasts for less than five years.
The PRA’s consultation period for the changes closes on 29 June 2016 and the department invited feedback on the proposals before that date.
The paper added: “The proposals on affordability testing aim to improve the safety and soundness of PRA regulated firms by ensuring that they take full account of any potential interest rate rises in their buy-to-let underwriting assessment.
“This will help curtail inappropriately risky and imprudent lending – loans that are affordable under the current low interest rates environment but will quickly become unaffordable if and when interest rates rise and lower potential credit losses and repossession costs.
“As a result, these proposals are also expected to help insulate the lenders, the financial sector and wider economy from the impact of negative shocks in the housing market.”
The government has already introduced a 3% stamp duty surcharge coming in from 1 April and is reducing the amount of mortgage tax relief landlords can claim from 45% to 20% between 2017 and 2020.
Jonathan Burridge, an independent mortgage broker based in East London, said: “Rather than incentivising people to sell by giving them tax breaks like capital gains holidays the government is going the other way to boost the Treasury’s coffers.
“I can see it having a significant shock to the buy-to-let sector and therefore lenders.
“Only people who can buy properties with cash will be in a position to do so.”
He added: “Are we removing an effective sector from the working class population? The people this impacts is this government’s voters.
“I struggle to see these measures still being in place in 2020 when it wants to be re-elected because it is removing what is a relatively stable and good form of investment.
“Rather than just trying to slow down the flow they are turning the taps off.”
