The PRA said: ‘The proposals seek to ensure that firms conduct their BTL business in a prudent manner. They aim to prevent a marked loosening in  BTL underwriting standards and to curtail inappropriate lending and the potential for excessive credit losses.’

The plans include requiring all firms to use an affordability test when assessing a BTL mortgage request, which could include an interest coverage ratio (ICR) test and/or an income affordability test. However, PRA has stopped short of proposing supervisory guidance with respect to specific loan-to-value (LTV) standards.

The PRA is proposing that firms, among other things, give consideration to all costs associated with renting out the property where the landlord is responsible for payment; any tax liability associated with the property; and where personal income is being used to support the rent, the borrower’s income tax, national insurance payments, credit commitments, committed expenditure, essential expenditure and living costs.

As regards the interest rate test, the PRA suggests firms should consider likely future interest rates over a minimum period of five years and should assume a minimum borrower interest rate of 5.5%.

In addition, the PRA is looking to establish a standard definition of what constitutes a ‘portfolio landlord’, which would typically be someone with four or more mortgaged BTL properties.  Lenders would be required to show evidence of a more strict underwriting regime for these individuals.

The PRA also wants to clarify the application of the SME supporting factor on BTL mortgages. This is used to reduce by approximately 24% the capital requirements on loans to SMEs on qualifying retail, corporate and real estate exposures.

The PRA says it does not consider that BTL borrowing falls within the objective of the SME supporting factor and proposes to clarify in the supporting statement that it expects firms to consider the intended purpose of a loan before applying the SME supporting factor.

The SME supporting factor should not be applied where the purpose of the borrowing is to support BTL business, and the regulator says it ‘would expect firms to comply with the spirit and intent of this statement’.

The PRA says it expects the BTL market to continue growing after the implementation of its new proposals, although it estimates there will be a decrease in the number of cumulative new approvals for BTL mortgages by about 10-20% by Q3 2018, and correspondingly, a lower value of the stock of BTL mortgages.

The consultation points out that the number of BTL mortgage approvals and the value of stock of BTL mortgages will also depend on the extent to which firms and borrowers respond to the recent tax changes and other developments in the housing market, which include the imposition of a 3% stamp duty land tax (SDLT) surcharge on additional property purchase others than the main residence, and reductions in the tax reliefs available to landlords.

The consultation closes on 29 June 2016 and any comments or enquiries should be sent to [email protected]

Details on the buy-to-let (BTL) mortgage lending rules consultation are here