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  4. Underwriting standards for buy-to-let mortgage contracts CP11/16

Underwriting standards for buy-to-let mortgage contracts CP11/16

Last updated: 29 Jun 2016

Consulting body:
Prudential Regulation Authority
Period of consultation:
Runs from 29 March 2016 to 29 June 2016
CML action:
Response submitted

The PRA consultation paper CP11/16 sought views on a supervisory statement which set out the PRA’s proposals regarding its expectations of minimum standards that firms should meet when underwriting buy-to-let mortgage contracts.

The proposals also included clarification regarding application of the small and medium enterprises (SME) supporting factor on buy-to-let mortgages and are relevant to PRA-regulated firms that undertake buy-to-let lending that is not already subject to FCA regulation.

The clarification regarding the SME supporting factor is relevant for firms bound by the Capital Requirements Regulation (575/2013) (CRR).

The consultation paper proposed:

  • a set of expectations for firms that underwrite UK buy-to-let mortgage contracts where the land is intended to be occupied as a dwelling on the basis of a rental agreement, in pounds sterling, regardless of whether the borrower is an individual or limited company; and
  • a clarification in relation to application of the SME supporting factor on buy-to-let mortgages.

CML response

We welcome the decision by the PRA not to take an unduly prescriptive approach, instead giving lenders the flexibility to interpret their responsibilities in accordance with commercial drivers, as long as they can satisfy the PRA that they are lending in a prudent and sustainable manner. We are not persuaded that plans for growth within the buy-to-let sector can only be achieved by relaxing underwriting standards.

Looking forward, conditions in the buy-to-let market need to be seen in the context of other regulatory and fiscal changes: notably the Stamp Duty surcharge on additional properties; forthcoming limits to mortgage interest tax relief; and the likely granting to the Financial Policy Committee of Powers of Direction. We are concerned that the PRA’s proposals may add to and magnify the effect of these policies, potentially undermining the strength and sustainability of the buy-to-let sector, thus heightening micro- and macro-prudential risks.

The full consultation response can be downloaded below.