Why did the regulator want to cut 20% of the Buy-to-Let Market?

The Prudential Regulation Authority has announced in a "Consultation Paper" its proposals will lead to a decrease in "new approvals for buy-to-let mortgages by about 10-20%" a large chunk of a growing sector.

The new rules will prevent lending institutions from self-pricing risk as the PRA aims to impose:

• mortgage interest coverage ratio (ICR)
• personal income affordability test
• interest rate stress test over five years

The PRA outlines that business that borrow to invest in rented accommodation "could see an impact on their ability to obtain a buy-to-let-mortgage" as it aims to prevent a loosening in buy-to-let underwriting standards.

The 20% reduction in the Buy to Let Sector proposed by the Prudential Regulation Authority (PRA) is in addition to Stamp Duty Changes starting April 2016 and the removal of mortgage interest relief.

Portfolio Landlords (landlords with four or more properties) are described as "inherently more complex" and to expect a full assessment including:

• training/competence as a landlord
• assets and liabilities assessment
• tax assessment
• overall btl portfolio assessment and
• historical and future cash flow assessment

Landlords trying to escape the mortgage interest relief via a Limited Company would not be surprised that the PRA outlines the minimum standards will be enforced "regardless of whether the borrower is an individual or a company".

The PRA moving to prevent lending institutions from self-pricing risk derives from there desire for lenders "not base their assessment of affordability on the equity" - which means low Loan to Value will not be an exemption.

Put simply businesses borrowing less than the remaining equity in a property will have to face tougher requirements, despite minimal financial risks to the lending institution.

The prevention of lending institutions to self-price risk moves towards reducing competition for buy-to-let business - as the PRA intends to implement a standard "interest coverage ratio" formula across the buy-to-let lending industry.

The Financial Planning Committee at the Bank of England commented that growth of buy-to-let mortgage lending is likely to slow in Q2 as changes to stamp duty take effect. Looking ahead, the combination of forthcoming changes to mortgage interest tax relief and the implementation of the PRA Supervisory Statement will probably dampen the growth of buy-to-let mortgage lending relative to lenders’ plans.

In addition to this the HM Treasury has consulted on giving powers of direction to the FPC on buy-to-let mortgage lending and will respond to that consultation, including with final secondary legislation, in due course.