Mortgage broker questions PRA’s 5-year fix loophole

Ryan Bembridge

November 4, 2016

Mortgage broker Lee Grandin has slammed the Prudential Regulation Authority for giving buy-to-let landlords who take out a 5-year fix rate mortgage an exemption from its 5.5% stress test.

Grandin, owner of B2B firm Lend2Landlord and buy-to-let brokerage Landlord Mortgages, reckons the PRA’s leniency could cause some landlords to borrow too much and default on their loans after the 5-year period.

The PRA’s interest coverage ratio tests and interest rate affordability stress tests will come into force on 1 January 2017. Variable rates and shorter-term fixes will be stress tested at 5.5% for five years.

Grandin said: “Relying on the PRA’s 5-year fixed rate rule to borrow more money could look highly toxic if the cost of funds climbs over the next five years.

“Imagine if house prices fall or stagnate – the lender is stuck with a landlord who is ‘hammered’ by the new tax rules and the loan can’t be restructured onto a similar pay rate.

“A lot of loans could go into default because people will be in a negative position if they are highly geared, and as interest rates go up that situation will get worse.

“The PRA is being too lenient – you don’t know what’s going to happen in five years’ time.”

He thinks highly geared London landlords are most at risk.

The PRA rules state that it ‘expects firms to consider the borrower’s refinancing risk at the end of the fixed or capped rate period’.

Grandin added: “This is vague but it seems to imply there are no grounds to have the 5-year rule in the first place if the lender is to consider affordability at the end of the 5-year fixed period.”

David Hollingworth, associate director of communications at London & Country, feels the onus is on lenders to suitably stress test borrowers on a 5-year fix.

He said: “I can see sense in the exemption because you know what the rate is going to be in that 5-year period.

“But you don’t want to see someone taking out a 5-year fixed rate simply because it offers the opportunity to borrow more.

“Advisers need to be clear about the pros and cons of 5-year fixed rates, as they are not suitable if the borrower is considering selling up in a few years’ time.

“If you are geared as highly as possible there is the danger of getting stuck with a variable rate at the end of the term.”

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