Let’s take a trip back in time for a moment. Just over five years ago, following a review of the buy-to-let market, the Prudential Regulation Authority (PRA) announced its expectations around firms’ underwriting standards across the buy-to-let market. The intention of this review was to bring all lenders up to prevailing market standards and guard against any slipping of underwriting standards during a period in which firms’ growth plans could be challenged by the changing economic landscape and the impact of forthcoming tax changes.
During this time, the PRA’s supervisory statement outlined minimum expectations that firms should meet in underwriting buy-to-let mortgages, specifically:
- Affordability assessments should take into account: borrower’s costs including tax liabilities, verified personal income (where used by the lender) and possible future interest rate increases. When setting the expectations for future interest rate increases, the PRA reviewed the prevailing standards in the industry and considered the impact of changes in interest rates and calibrated the stressed rate accordingly.
- Lending to portfolio landlords (defined by the PRA as being those with four or more mortgaged buy-to-let properties) should be assessed using a specialist underwriting process.
- The PRA wishes to clarify that the provision in Capital Requirements Regulation (CRR) which reduces the capital requirements on loans to small and medium-sized enterprises by around 25% should not be applied where the purpose of the borrowing is to support buy-to-let business.
This review came on the back of changes to mortgage interest tax relief announced by HM Government in 2015, which had already led to several firms increasing their interest cover ratio affordability thresholds. The PRA reaffirmed its expectation that firms should also take these new costs into account when assessing affordability.
So what does this mean five years down the line?
Initially at least, this resulted in stricter lending criteria on shorter fixed-term buy-to-let mortgage deals, with some landlords finding it tougher to obtain sufficient funding. Back in 2016, the take-up of two-year fixed deals accounted for over two-thirds of market share, while five-year deals were far less popular amongst landlords, accounting for just over one in five loans.
Now I don’t have the exact statistics on hand to chart the rise in prominence of five-year fixed rates since this time, although it’s no secret that this has been significant. However, what I do know is that September 2021 started with a total of 2,968 buy-to-let products on offer, the highest number seen by Moneyfacts since October 2007. This represents an additional 71 products when compared to pre-pandemic times in March 2020 and demonstrates increased competition across the sector. This rise in product numbers signifies a welcomed shift, especially for the remortgage market as thousands of buy-to-let mortgages have matured, and will continue to mature in Q4, predominantly from the early take-up of this first wave of five-year fixes.
The five-year fix will remain highly popular for landlords who are looking to control costs and secure their outgoings whilst tapping into some historically low rates. This is being supported by an increased reliance on a good, professional advice process as even the most experienced landlords are looking for guidance and support from the intermediary market to find the right solutions to meet their shifting portfolio requirements.
From a CHL perspective, we are seeing five-year fixes via a limited company vehicle make up a strong proportion of our lending and we fully expect to see this trend continue in 2022 as our distribution channels grow and our lending proposition evolves. So let’s look to the future, whilst also benefiting from the past.
Ross Turrell, Commercial Director, CHL Mortgages