PRA to review underwriting standards of buy-to-let lenders

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The Prudential Regulation Authority has revealed it intends to review the underwriting standards of buy-to-let lenders.

The announcement was made yesterday in the most recent Financial Stability Report and comes at a time when there is intense scrutiny of the buy-to-let sector.

Not only has Chancellor George Osborne announced a gradual cutting of tax relief for landlords to the basic rate of income tax from 2017, but he will increase stamp duty rates for buy-to-let properties in April.

Moreover, Osborne has given the Financial Policy Committee powers to place lending caps on the sector – the details of which will be decided in a forthcoming consultation.

Bank of England governor Mark Carney says the review of underwriting standards was to ensure there was not a shift from “responsible to reckless”.

He adds: “The FPC welcomes the PRA’s intention to review underwriting standards amongst buy-to-let lenders and we take note of recently announced tax changes that will affect this sector. The FPC will monitor developments in buy-to-let activity closely.”

Mortgages for Business managing director David Whittaker says: “We’ll be interested to see the PRA’s informed view because – at least on the surface – buy-to-let mortgages have outperformed the residential mortgage market in this current phase of the recovery.”

The Financial Stability Report notes that buy-to-let spreads have fallen by 1 percentage point over the past year and, over the past 18 months, the share of new lending by lenders outside the top six has increased from 27 per cent to 42 per cent.

While the report stresses that “this greater competition has not to date led to a widespread deterioration in underwriting standards of UK banks”, it says some smaller lenders have loosened their criteria, namely their maximum LTV thresholds.

The report adds: “Strong growth in buy-to-let lending, and the potential for underwriting standards to slip, may have implications for financial stability.”