Back in March the Prudential Regulation Authority (PRA) issued a Consultation Paper covering minimum underwriting standards for buy-to-let mortgages that fall outside FCA mortgage regulation.
If implemented, the proposed changes would require unregulated BTL providers to carry out a number of specific checks when assessing new applications. Although these are broadly aligned the provisions of the MCOB handbook, they do introduce some new functionality that may require systems and processes to be updated.
For example, where rental income from the property is to be used for repayments, a standardised Income Coverage Ratio calculation is being proposed. As well as considering market demand and average rental income in the area, lenders must also consider the borrower’s tax liability and other expense associated with property letting such as agent fees, gas safety certification and general maintenance and repairs.
In addition, in cases where some or all of the loan instalments will be met from the borrower’s personal income, an assessment of their credit commitments and household expenditure needs to be made.
The proposed rules also define a new interest rate stress test calculation which differs from those defined under existing mortgage regulations.
There are additional requirements for landlords with four or more BTL mortgages. They will be subject to additional scrutiny, including an assessment of their overall portfolio, past and future cash flow and projected tax liability.
The consultation process closed at the end of June, and it is not yet clear when the final regulations will come into force. It remains to be seen how feedback from the industry will influence the regulator’s position, and whether there will be a refinement of the rules to help lenders align their underwriting across regulated and unregulated business.