The Prudential Regulation Authority’s buy-to-let proposals would disproportionately punish high net worth borrowers, the Council of Mortgage Lenders has warned.
In March the PRA proposed stress testing buy-to-let using an interest coverage ratio test and/or an income affordability test, but the CML said high net worth borrowers are commonly backed by personal guarantees or supported by collateral.
It also urged the PRA to give firms advancing fewer than 100 high net worth mortgages a year an exemption from new regulation.
Writing on the News & Views section of the trade body website, CML communications manager Bernard Clarke said: “The PRA’s proposals would disproportionately affect a small number of firms who lend to high net worth clients.
“When these customers take out buy-to-let mortgages, their borrowing may be backed by personal guarantees or supported by collateral in addition to the property against which they are borrowing.
“Lenders in this market are also in many instances too small to be significant from a macro-prudential perspective.
“We therefore suggest that lenders advancing fewer than 100 mortgages a year (on a rolling basis) exclusively to high net worth clients should be excluded from the proposed regulations.”
Clarke wrote that high net worth customers should be defined as those with a net annual income of more than £300,000, or assets worth more than £3m, mirroring the Financial Conduct Authority's definition.
On the PRA’s proposal to stress test borrowers against an interest rate of 5.5%, he said “we… question the logic” of such an "arbitrary minimum rate".
Regardless of what changes it makes the PRA was advised to clearly timetable when measures are implementedto give lenders time to make adjustments, for example by changing systems, recruiting and training new staff.
But Clarke warned the PRA to take stock of the number of changes already hitting the buy-to-let sector, which have included the 3% stamp duty surcharge and the reduction in mortgage tax relief for higher rate tax taxpayers from 45% to 20% from 2017 to 2020.
