April 8, 2016
At Enterprise Finance, we’ve always been strong advocates of regulation for the transparency and protection it affords consumers and the increased market standards it demands. You only have to look at how the residential mortgage market has been improved by greater legislation, to realise the transformational effect that can have. On 29th, along came consultation on guidelines from the Prudential Regulation Authority (PRA) on lending criteria for buy-to-let mortgages. Buy-to-let came under the Government spotlight last year, with increased Stamp Duty for additional homes and the reduction of tax relief for landlords. Although the Chancellor made no additions to this in this year’s Budget, suggesting he may feel he hit the private rental sector too hard the last time around, the PRA has now entered the debate.
Among the recommendations in the PRA’s Consultation Paper are: an affordability assessment, the requirement for lenders to verify borrowers’ personal income, a minimum interest rate and a specialist underwriting process for landlords with more than four properties. While the first two of these are eminently sensible – and not dissimilar from the checks that specialist lenders already carry out – minimum interest rates might be harder to implement, and being too rigid with certain criteria might rid the sector of the flexibility that has been one of its strongest attributes. It’s no secret that the bridging and buy-to-let sectors are intrinsically linked as a number of landlords rely on short-term finance to assist with their property projects, so anything impacting the latter is bound to have a knock-on effect on the former.
However, though it is important to be aware of these latest developments and factor them into future plans, there is no need to panic just yet. First, it’s notable that the PRA has been liaising with banks for some time and believes that around 75% of banks already comply with the proposals, limiting their overall impact. Further, whilst the PRA is acting to protect depositors, specialist lenders who are not PRA-regulated can expand to meet the evident need in the buy-to-let and adjacent sectors such as bridging finance. For example, our sister business West One Loans, brings together borrowers with a panel of private investors, who can opt to fund a particular deal that fits their personal risk profile. The ability of the non-bank lenders to step in and meet the customer need, whilst the PRA maintains retail customer protection, reflects the functioning of a healthy capital market.
Figures from the Council of Mortgage Lenders suggest that the overall share of the market accounted for by specialist lending has risen from 0.1% in 2010 to around 4% at present, and there is every reason to suggest this will continue into the future. Increased regulation needn’t knock this growth pattern off its stride as there will always be a significant swathe of borrowers whose financing needs don’t fit inside the boxes of mainstream finance. These people will need specialist products, agile lenders with capacity to lend flexibly and, most importantly, expert intermediary advice to steer them in the right direction. In some ways, the proposed PRA restrictions could play into the hands of specialist lending businesses like ours.
Danny Waters' complete bridging watch column is available on Mortgage Strategy.