New Underwriting Standards to Maintain Discipline in Buy-to-Let Mortgage Market

The Prudential Regulation Authority’s (PRA’s) new underwriting standards will maintain discipline in the buy-to-let mortgage market, according to Paragon Mortgages, one of the UK’s leading specialist buy-to-let lenders.

Paragon has welcomed the PRA’s Supervisory Statement, which will introduce more comprehensive and uniform affordability testing for buy-to-let mortgages.

The standards will introduce new rules to ensure that lenders undertake a thorough assessment of mortgage affordability based on a more standardised review of rental income and property costs, alongside a full understanding of each buy-to-let landlord’s wider economic circumstances.

This will include a requirement for lenders to consider how buy-to-let applicants are affected by the tax changes announced last year, including the Stamp Duty surcharge and reduction in mortgage interest tax relief.

Importantly, the new standards also require lenders to tailor their underwriting approach to distinguish between landlords with small property portfolios of no more than three buy-to-let properties, and those with more extensive and complex investments.

The Managing Director of Paragon Mortgages, John Heron, comments: “As an experienced specialist in the buy-to-let sector, Paragon is already well-aligned with the PRA’s requirements.

“A thorough affordability assessment, together with a full understanding of the characteristics of each property and landlord that we lend to has always been central to our approach and instrumental in maintaining our strong credit metrics.”

He explains: “By requiring a more consistent approach across the market, the PRA should be able to ensure that the strong credit performance of buy-to-let lending is maintained and that lending remains sustainable.

“We would, however, expect these measures to restrict the level of growth in the buy-to-let market going forward, by cutting out more marginal business. We also expect a larger proportion of the market to be specialist in nature, consisting of more professional portfolio landlord business. We believe that Paragon is particularly well placed to capitalise on the opportunities this presents, given its unparalleled experience in this sector.”

Do you believe that the PRA’s new underwriting standards will benefit buy-to-let landlords looking to invest?