The PRA recently conducted a review of the mortgage market covering 31 lenders (or 92% of the buy-to-let lending sector). Its analysis revealed that most of the growth in mortgage lending in recent years has been driven by increases in buy-to-let mortgage lending, rather than traditional owner-occupier mortgages. The analysis also suggests that underwriting standards for buy-to-let lending may have slipped at some lenders.

The PRA is therefore proposing that lenders strengthen their underwriting standards in relation to these loans, which include an analysis of the impact of increases in interest rates. Further affordability tests on borrowers must be carried out before buy-to-let loans can be extended. A more robust underwriting process will need to be followed in the case of borrowers with more than four buy-to-let properties. Lenders will also be required to have enhanced 'risk management, systems and controls' in place in respect of their buy-to-let lending business.

Perhaps more significant is the PRA's policy announcement on the availability of the discounted capital charges for loans to SMEs. Currently, Article 501 of the Capital Requirements Regulation (CRR) allows banks to avail of a reduction of approximately 24% of the capital charges for loans to natural persons or corporate clients that qualify as an 'SME' under European regulations. The PRA have now said that they do not consider that buy-to-let mortgages qualify for this SME discount. The removal of this discount effectively increase the capital cost of buy-to-let lending for banks. This change in capital treatment may well have a more significant effect on this sector than the stricter underwriting standards.

The FPC expect that this combination of measures will "dampen growth of buy-to-let mortgage lending relative to lenders' plans".

In light of the PRA's clarification on the availability of the SME discount, all banks subject to the CRR will need to examine their loan portfolio in order to ensure that any loans currently benefiting from this beneficial SME treatment do not fall into the buy-to-let category.

The consultation is open until 29 June 2016.

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