Stephen Johnson, managing director for property finance, comments on the findings from the PRA consultation:

04 October 2016

“The Prudential Regulation Authority (PRA) released its findings yesterday of its investigation into underwriting standards for the BTL market. This is a key issue that we have held at front of mind in recent months and have been considering how this will take shape across the Shawbrook offering. Our commitment to sustainability and the long term health of the industry is unwavering and we will be releasing more information to our Broker Partners over the coming weeks clarifying our position in relation to the PRA standards paper.

Key takeaways from the announcement include:

Interest Cover Ratio
The policy statement is broadly in line with the draft consultation, albeit there is now a deadline for implementation of the key Interest Cover Ratio (ICR) changes by the end of the year. As we commented earlier in the spring, the conclusion of the various changes is that the market will implement different ICR requirements for limited companies and individuals where the former will be able to gear more highly. Ultimately though, the landlord community will need to adjust to lower levels of available debt and will therefore require more equity, or have to grow at a slower pace than was previously possible.

Implications for investor strategy
We are also likely to see a potential shift in investor strategy to higher yielding properties such as flats, multi-units, HMOs and mixed use schemes. In addition, potentially different regions where higher yields exist may become more attractive to investors. However, this may mean more collateral risk for investors or lower capital appreciation potential in the longer term. Longer term fixed rates may also enable higher gearing, (excluded from the stressed interest rate requirement), but investors need to make sure they are able to refinance at expiry or they risk being left on high reversion rates without the ability to refinance.

Defining a Portfolio Landlord
Another key takeaway is the definition of a portfolio landlord when they reach four properties. At this level a “specialist underwriting approach” is required which will ultimately mean a more manual and bespoke assessment. Landlords will see some disruption among existing lenders as they adapt to this requirement, although there is a longer runway for implementation than the ICR changes.

These changes will lead to an adjustment for investors, but the fundamentals of the Private Rented Sector (PRS) remain strong which will also be supported by further price competition as recent BoE liquidity filters through to customers.”