The Prudential Regulation Authority (PRA) has confirmed that it will introduce tougher underwriting standards for buy-to-let lenders by the start of next year.
The decision follows on from an earlier consultation in which the PRA contemplated changing buy-to-let underwriting standards in March for all lenders not already subject to FCA regulation.
The original consultation proposed that all lenders should assume a minimum borrower interest rate of 5.5% for the first five years of the loan on all mortgages, including buy-to-let, unless the interest rate is fixed for more than five years.
Yesterday, the PRA confirmed the 5.5% interest rate figure would apply from 1 January 2017, with no link between the figure and the Bank of England base rate. But the regulator did confirm that rent increases could be included in affordability checks.
The PRA said: “In the PRA’s view, the expectations for minimum underwriting standards included broadly reflect existing practice for most lenders in the market today.
“Therefore, the PRA believes that it is appropriate to finalise the standards at this time.”
The PRA has confirmed that holiday lets, bridging loans, property investment lending and corporate lending will all be exempt from the new underwriting standards, but it insists that it will monitor these sectors to ensure that ‘prudent underwriting standards are maintained’.
Reflecting on the PRA’s underwriting standards for buy-to-let mortgages, the Council of Mortgage Lenders director general Paul Smee commented: “The new underwriting requirements broadly reflect existing practice, as the PRA says.
“While the regulator will need to keep the impact of the new requirements under review, we expect the effect to be modest under current market conditions, and we do not anticipate the measures resulting in any shock to the market.”