Article Posted -
29 Sep 2016

Today has seen the publication of the Bank of England’s Prudential Regulation Authority’s  (PRA's) expectations on Buy-To-Let (BTL) underwriting.

The PRA Policy Statement can be found here and its full document here 

In short it says:

  • Affordability assessments should take into account: borrower’s costs including tax liabilities, verified personal income (where used by the lender) and possible future interest rate increases. When setting the expectations for future interest rate increases, the PRA reviewed the prevailing standards in the industry and considered the impact of changes in interest rates, and calibrated the stressed rate accordingly.
  • Lending to portfolio landlords (defined by the PRA as being those with four or more mortgaged buy-to-let properties) should be assessed using a specialist underwriting process.
  • The PRA wishes to clarify that the provision in Capital Requirements Regulation (CRR) which reduces the capital requirements on loans to small and medium-sized enterprises by around 25% should not be applied where the purpose of the borrowing is to support buy-to-let business.
  • An implementation timeline of 1 January 2017 for the more straightforward changes, and 30 September 2017 for the remainder.
  • Allowing firms to assume reasonable rental increases when assessing affordability in the context of possible future mortgage interest rate increases.
  • Excluding those re-mortgaging (and not increasing borrowing) from the supervisory statement, in a similar way to residential lending.
  • Reflecting the change to mortgage interest tax relief announced by HM Government in 2015, which has already led to several firms increasing their interest cover ratio affordability thresholds. The PRA has reaffirmed its expectation that firms should also take these new costs into account when assessing affordability.

Two sections stick out immediately.

Section 2.40 of the Policy statement says

“The PRA also considered the impact that the personal tax changes would have on landlords, and particularly those landlords using their personal income to supplement the rent.  For portfolio landlords, who are not set up as limited companies, this additional tax burden will be considerable and so a portfolio view becomes even more relevant for new borrowing.”

Section 2.6 of the Supervisory Statement says that  

“The PRA also expects firms to take into account any tax liability that is associated with the property. For the avoidance of doubt, this should include mortgage interest tax relief. Firms may make a simplifying assumption that all borrowers are subject to higher rate tax but this may result in firms declining otherwise eligible borrowers.”

(Emphasis ours)