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  • Mortgages & Finance

    Biggest changes in BTL history - stress tests

    Stress test calculations are changing because, in short, the Prudential Regulation Authority (PRA), says so.

    If below happens, I would suggest, it will have an even bigger impact on the buy to let market, than recent tax changes, especially if WE HAVE TO undergo a -  'specialist underwriting process' for anyone with 4 or more properties.

    This is very, significiant indeed...... and maybe it has already been discussed on here before, but this is pretty major stuff heading our way.............

    Summary below and click on article for full information.

    • Affordability assessment should take into account the borrower’s costs associated with letting the property, including tax liabilities
    • If firms (lenders) wish to use the borrower’s personal income to support the mortgage payment, this should be verified
    • Affordability assessments should take into account expectations regarding future interest rate increases, subject to a minimum stressed interest rate
    • Lending to ‘Portfolio Landlords’ (i.e. those with four or more mortgaged buy-to-let properties) should be assessed using a specialist underwriting process

    http://www.mortgagesforbusiness.co.uk/ne...g-tougher/

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    If F1_Fan is that far behind the news on that PRA consultation, wait until (s)he catches up with BCBS risk weights and Basel III...

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    Hi J,

    We do endeavour to be first with the news and include it in our emailer to the PT database, so wondering how we can communicate better with landlords to keep them up to date?

    In this day and age, there really is no excuse for not keeping informed.  There is a wealth of information available to landlords, and we do our upmost to spoon-feed it to them.

    On that note, could you write a new post about Basel III and BCBS risk weights?  I've not heard of the latter!! :0

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    They are both a bit chewy Vanessa and closely related.  Both are yet to fully implemented.

    Essentially both are mechanisms by which global bank regulators attempt to ensure that banks are operating in a way which isn't too risky.

    There is a common theme emerging that works on the hypothesis that mortgages, particularly BTL lending, particulary IO and particularly high leverage, should be more expensive / more stringently assessed (this is where, imo, the MMR and the PRA consultation stemmed from).

    In both cases, a variable that can be changed is how much (regulatory) capital a bank needs to hold against any particular liability (banks create money by virtue of their licence to lend out multiples of the assets they hold).

    The latest iterations of Basel III and the BCBS risk weights all point to BTL mortgages requiring lenders to hold more (regulatory) capital against them than for an equivalent sized home owner mortgages

    So, it becomes more expensive for the lender to lend money on a BTL basis than on a home owner basis

    Some scenarios include LTV scaled capital increases. i.e. to make a 75% LTV mortgage, the lender would need to hold more (regulatory) capital than for a 50% LTV mortgage

    Some scenarios make Interest Only mortgages more expensive (in terms of regulatory capital required) than repayment mortgages.

    Almost all scenarios make BTL mortgages more expensive (in terms of regulatory capital required) than they are today.

    For some lenders, that means that they will need to charge more interest / fees on BTL mortgages than for home owner mortgages in order to make the lending (as) profitable.

    For some lenders, it might mean they withdraw from the BTL market altogether.

    Someone who knows more may offer an easier to understand / comprehensive insight -  I would be interested to see an interview with the Stephen Johnson / Hugh Fitzpatrick of Shawbrook on the topic for instance.

    You can lose yourself in the detail starting from here

    https://www.bis.org/bcbs/publ/d347.htm

    https://www.bis.org/bcbs/basel3.htm?m=3%7C14%7C572

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    I don't get any emails from your database, but I had a feeling it would have been on here, but I get alot of emails as we all do, but only the odd one about subjects like this are so significiant to the btl market.

    Maybe, I'm not up on it because I haven't been using lending recently, but it's pretty major that's for sure.......

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    The article states "growing too fast" - that sounds like a very subjective statement to me. I should be very keen to be shown the actual numbers and on what basis that comment is made - who is to say what the "correct speed" is and how that is justified. So much talk around property, and often little hard evidence.

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    I think they are trying to stop the ''boom and bust'' cycles of the past, that's the ultimate aim....In fairness, if they let what happened before, happen again then we'd all blame the Government.

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    From the PRA consultation document itself:

    "1.2 The supervisory statement follows a PRA review of underwriting standards in the buy-to-let sector which covered 31 firms (c.92% of the market). This review highlighted concerns about lenders’ growth plans and how they might meet them. In particular, there is a risk that firms relax underwriting standards, thus affecting their safety and soundness. The findings suggested a need for microprudential action.

    1.3 The PRA’s proposals seek to ensure that firms conduct their buy-to-let business in a prudent manner. They aim to prevent a marked loosening in buy-to-let underwriting standards and to curtail inappropriate lending and the potential for excessive credit losses.

    3.6 The buy-to-let market is expected to continue growing after the implementation of the proposals set out in the CP. However, when compared with the baseline absent of the proposals, it is estimated that the proposals will lead to a decrease in the number of cumulative new approvals for buy-to-let mortgages by about 10-20% by Q3 2018, and correspondingly, a lower value of the stock of buy-to-let mortgages. The number of buy-to-let mortgage approvals and the value of stock of buy-to-let mortgages will also depend on the extent to which firms and borrowers respond to the recent tax changes and other developments in the housing market.

    3.7 Any reduction in buy-to-let activity and lower buy-to-let mortgage stock will lead to a reduction in short-term revenues for lenders and mortgage brokers. While affected firms may be able to recover some of the reduction in revenues by lending to owner-occupiers or other business activities in the economy, we think some more affected firms may find it difficult to recover lost revenues. Some buy-to-let investors could see an impact on their ability to obtain a buy-to-let mortgage and/or the profitability of their lending activities due to higher deposit requirements. However, affected investors may be able to find returns in other investment opportunities."

    https://www.bankofengland.co.uk/pra/Docum...cp1116.pdf

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    I believe the aim is to stop as much new lending and as such wouldn't effect current remortgaging. As for basel 3 it seems that was just ignored with the recent relaxing of lending that will probably spread around the world if the cycle sticks to form. I have six and always planned to sell two to pay the others off when doable. Now it would seem prudent to fix any mortgages coming up for five or ten years. Negating effects of changes and sell others if need be as the market will have progressed by then. Hard to say but generally the idea is lowering ltvs should be considered now and always was my game plan.

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