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Landlords fear election could ‘end’ buy-to-let

Landlords are fearful the buy-to-let sector will be used as a political football in the upcoming election, with politicians competing with pledges that could “end the market”.

A number of mortgage brokers said they have been contacted by their landlord clients with concerns about a Labour majority government and its potential ‘right to buy’ scheme.

The right to buy scheme replicates the scheme introduced by the Thatcher government which allowed social housing tenants to buy their homes at a discounted price.

Under the Labour proposal, the government would set a discounted price for private property, likely based on how long the tenant had lived there.

Dan White, director at Champion Hall & White, said: “I’ve had people call me about the scheme and I do think landlords will opt to exit the market.

“I think this could be catastrophic for the housing market and an outrageous ruling. Enforcing a right to buy would seriously damage the integrity of the property market and encourage the wrong message.”

Mark Bailey, director of property asset manager Landwood, warned a right to buy scheme could result in a negative outcome for renters if landlords chose to sell up and rental supply diminishes.

He said: “If politicians of any leaning are serious about fixing the housing crisis then this ridiculous policy is not the way to go about it.

“The solution is to build more social housing, more starter homes and get more people on the property ladder and reduce the number of renters that way.”

Sarah Drakard, IFA at Cruze Financial Solutions, said landlords thought they would be “even more attacked” under a Labour government than they already are.

She said: “Landlords already feel quite hard done by and hit by government policies over the past few years, but many think a Labour government would potentially bring changes that would make being a landlord no longer viable economically.”

The buy-to-let market grew rapidly after the financial crisis but its growth has since stalled after a number of tax and regulatory changes introduced by the Conservative government hit landlords’ pockets.

How the rules changed:
An additional 3 per cent stamp duty surcharge, introduced in April 2016, was closely followed by the abolition of mortgage interest tax relief for landlords.

Landlords then took a further hit when a shake up of rules by the Prudential Regulation Authority meant buy-to-let borrowers were now subject to more stringent affordability testing.

The changes to mortgage relief have been phased into the system since April 2017, but by April 2020 landlords will be unable to deduct any of their mortgage expenses from taxable rental income.

Instead, they will receive a tax-credit based on 20 per cent (the current basic tax rate) of their mortgage interest payments.

Following the changes, landlords who were higher or additional-rate taxpayers would now only get refunds at the 20 per cent rate, rather than top rate of paid tax.

On top of this, landlords could also be forced into a higher tax bracket because they would need to declare the income that was used to pay the mortgage on their tax return.

Chris Sykes, a mortgage broker at Private Finance, said his landlord clients were concerned the election would mean “something else” would happen which would mean “the end of the buy-to-let market”.

He said: “I think landlords are generally worried and concerned as to whether their investment will end up being a financial asset or a burden.

“It used to be more of a safe investment but now it’s become less attractive and if any further political changes come in, it will become even less so.”

David Hollingworth, director of communications at L&C Mortgages, agreed, adding that anything that put a further squeeze on landlords could ultimately cause prospective investors to rethink their plans or ultimately see existing landlords considering scaling back or exit.

By Imogen Tew

Source: FT Adviser

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Average Buy to Let makes a return of just £2k a year pre-tax

The true cost of a being a landlord: Letting platform Howsy has revealed how the profitability of the buy-to-let sector is being squeezed due to the hidden costs of being a landlord, coupled with the financial penalties handed down from the Government via changes to stamp duty tax.

In recent times, the buy-to-let market has been considered a good investment for those with the financial means to operate within it, leading to a number of Government changes to dent this profitability through initiatives such as an increase in stamp duty tax.

Despite this, landlords are still considered to be ‘raking it in’, but Howsy has found that the average landlord is left with just £2,000 from an annual return of £13,000 once the hidden costs of being a landlord are paid for.

However, with the introduction section 24 mortgage interest relief restrictions and depending on the landlord’s tax status it is easily possible for this to be taxed into a loss!

The research shows that the initial start-up costs of Stamp Duty Tax (£6,663) and agency fees to find a tenant (£811) cost the average landlord £7,475 and that’s before the ongoing costs are considered.

According to a recent survey, the average landlord experiences 23.75 days of void periods a year during a tenancy, that’s an average of £535 a year.

What’s more, 73% of landlords buy with a mortgage and each and every year will see £6,921 paid out in interest as a result. Couple these costs with an additional £1,622 in agency management fees, an average annual maintenance and repair bill of £2,077 and you’re talking £11,147 per year.

In a worst-case scenario, UK landlords may also find themselves forced to stump up for additional unforeseen costs, such as the legal process to evict a tenant. While this doesn’t happen to everyone, there is a one in 500 chance that you will have to pay for bailiffs to evict a tenant from your property.  

What’s left?

Based on an average annual rental income of £8,112 divided by the average B2L property cost of £183,278, the average yield available is 4.4% – that’s an annual sum of £8,119.

Over the last decade, the capital appreciation of bricks and mortar has also averaged an increase of 2.85% a year, £5,223 in monetary terms. That means B2L landlords are seeing a return of £13,343 on their investment.

However, leaving start-up costs and unforeseen events out of the equation, once the average UK landlord has paid the ongoing costs associated with a buy-to-let property each year, they’re left with a profit of just £2,140.

Cost HeadingsCost Amount (£)
One-Offs Costs:£7,474.54
Ongoing Costs:£11,147
Average Annual B2L Return:£13,287
Average Annual B2L Return – Ongoing Costs£2,140

Costs Explained…

Cost HeadingsCost Amount (£)Notes/Sources
One-Offs Costs:
SDLT£1,165.00Initial stamp duty owed – Gov.uk
SDLT second home penalty£5,498.34Additional 3% – Gov.uk
Agency fees (tenant find)£811.20The minimum tenant find fee according to Which?
Total£7,474.54
Ongoing Costs:
Void periods£52723.75 days a year on average according to GoodLord
Mortgage Interest£6,920.7373% of B2L landlords have a mortgage according to Which?
Agency fees (management)£1,622.40The average annual management fee according to Which?
Maintenance & Repairs£2,077.00Average cost according to Pennington
Total£11,147
Positives:
Basis:
Avg annual rent£8,112Monthly average rent of £676 multiplied by 12
Avg B2L mortgage amount£132,075According to UK Finance
Avg house price£183,278Average B2L price according to Money Supermarket
Avg LTV72.06%
Avg equity£51,203
Return:
Annual Yield %4.4%Average annual rent divided by average B2L house price
Annual Yield ££8,064Average B2L house price multiplied by 4.4%
Capital appreciation per annum %2.9%Based on average property price change per annum over the last decade
Capital appreciation per annum ££5,223Source: ONS
Average Annual Return£13,287
Ongoing Costs£11,147
Final Annual Return£2,140

Source: Property118

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Landlords seek u-turns on tax relief

A majority of landlords believe future government u-turns on the increase in stamp duty and cuts to mortgage interest tax relief could provide a “significant stimulus” to the buy-to-let and private rental sectors, latest research by Foundation Home Loans reveals.

Over half (51%) of landlords argued that both measures to be addressed in order to help build greater confidence in the sector.

Jeff Knight, director of marketing at Foundation Home Loans, said: “It doesn’t seem surprising that the two biggest impacts on landlords over the past five years – stamp duty increases and cuts to mortgage interest tax relief – are seen as the biggest factors holding back the market.

“Clearly, such measures were always going to have a real influence and they have undoubtedly resulted in a large number of so-called amateur landlords either selling up, or not being able to go ahead and add to portfolios.

“We now have a sector which is much more in line with professional and portfolio landlords; utilising limited company vehicles to ensure they retain their tax relief, and where appropriate, adding to their portfolios via these structures.

“Because of this, the move towards greater levels of limited company business is likely to continue for many landlords, as I expect a u-turn is very unlikely despite fiscal loosening likely to be a strategy adopted in the very near future to stimulate a weakening economy.

Meanwhile almost a quarter (22%) suggested remaining in the EU would give the biggest boost, whilst 14% said securing the UK’s withdrawal from the EU would be the most helpful.

Four in ten landlords said they would still be willing to make their first investment in property, arguing that buy-to-let remains a good long-term investment.

According to the research however, 50% of landlords said that due to government intervention and regulatory changes, they would not choose to make a first investment decision now.

Only on in four landlords said they wanted to increase rents in the next 12 months, whilst a majority believe they are renting out at least one of their properties below market value.

Knight continued: “There is a continued appetite to be active in this sector and a recognition of the strong demand for quality properties from tenants.

“That being the case, and with a perhaps more sympathetic government ear, we might anticipate that demand for mortgage advice and buy-to-let mortgages will continue to grow, although many are clearly worried about the current economic uncertainty and what might happen in a post-Brexit world.

“The other positive here is the long-term view taken by many landlords and the fact over four in 10 would still invest today if it was their first property.

“Given all the demographics and the underlying demand drivers for the private rental sector, advisers are still likely to see a steady stream of landlord clients seeking to remortgage and/or purchase, for many years to come.

“It continues to pay to be a specialist in this sector and Foundation is here to help advisers develop their buy-to-let propositions for the demand that is clearly still out there.”

By Jessica Nangle

Source: Mortgage Introducer

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Landlords holding back from further purchases over next 12 months

Fewer than a third of landlords would add to their buy-to-let portfolio over the next 12 months, research claims.

A survey of 5,000 landlords by letting agent Benham and Reeves, assessed sentiment in the property sector amid tax and regulatory changes.

The majority (83%) said they were unlikely to sell up this year, but just 28% said they would consider investing in a property in the next 12 months.

Half said they would consider expanding their portfolio within the next five years.

Two thirds of landlords said the proposed changes to Section 21 notices made them more cautious about investing in a further property, while opinion was divided over changes to mortgage interest relief  and whether the sector still provided a good investment as a result, with 49% believing it is and 51% no longer sure.

Despite this uncertainty, 73% considered property is still the best and least volatile long-term investment when compared to all other asset classes.

More than a third (37%) felt very confident that they will see an adequate return on their portfolio over the next ten years, with a further six per cent stating they were extremely confident and 51% not as confident.

Marc von Grundherr, director of London-based Benham and Reeves, said: “The Government has really gone to war with buy-to-let investors of late and a consistent string of detrimental changes to the sector through Stamp Duty increases, tax relief changes and a ban on tenant fees has had the desired impact of denting industry sentiment and dampening appetite for future investment due to a reduction in profitability

“However, for the institutional buy-to-let investor, this is but a mere blip on a much longer timeline, and the overwhelming overtones are that while Brexit poses a challenging obstacle for the immediate future, the market remains the investment option of choice with many confident on a return further down the line.

“This is a testament to the durability of buy-to-let bricks and mortar in the UK as, despite a Government-backed clampdown, it remains a lucrative business and one that continues to gain the backing of those that are on the frontline.”

By MARC SHOFFMAN

Source: Property Industry Eye

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Capital gains tax take rises as landlords feel the squeeze

There has been an increase in capital gains tax receipts in a sign that landlords are selling up as regulatory and tax changes start to bite in the buy-to-let market.

Latest figures from HM Revenue and Customs revealed there was an 18 per cent increase in capital gains tax receipts in 2018-19 compared to the previous year – with the amount raised reaching £9.2bn.

According to industry experts, this has been driven in part by private landlords ‘offloading’ less profitable buy-to-let properties as landlords’ margins narrow.

Unlike when a homeowner sells their house or flat, private landlords are charged capital gains tax on any profitable gains they make so an exodus of private landlords from the market could lead to increased revenue for the exchequer.

The trend is a sign that landlords have started to feel the effect of tax and regulatory changes on their income, as had been predicted by the Intermediary Mortgage Lenders Association in January.

Imla warned this year’s tax return would be the first time many landlords would see the effects of the changes on their earnings.

Landlords have been subject to a number of regulatory changes in recent years, with an introduction of an additional 3 per cent stamp duty surcharge on second homes in April 2016 followed by cuts to mortgage interest tax relief.

Buy-to-let borrowers are also now subject to more stringent affordability testing under the Prudential Regulation Authority’s tightened underwriting rules.

Sean McCann, financial planner at NFU Mutual, said the double-digit hike in capital gains tax receipts could be attributable to this clampdown on private buy-to-let investors.

He said: “Capital gains tax is a growing source of revenue for the government. Last year’s record haul of £9.2bn already looks like it could be surpassed.

“The increase is partly due to some private landlords choosing to offload buy-to-let investments.”

Research from Arla Propertymark also showed the number of buy-to-let properties up for sale had increased by 25 per cent in April.

Mr McCann said: “Essentially, landlords are being squeezed from two sides by the taxman. From one side, the higher rate tax relief on mortgage interest is gradually being phased out, which makes it a much less profitable exercise.

“From the other, those looking to sell buy-to-let properties are being squeezed with an extra 8 per cent capital gains tax.”

Mr McCann went on to say that HMRC “clearly saw the opportunity to increase the capital gains coffers” when it targeted landlords and was now introducing new rules to collect the revenue earlier.

Currently, the tax is due by January 31 following the end of the tax year in which the sale has occurred but the government plans to change the rules from April 2020 to require tax to be paid within 30 days of the sale.

The government is also cracking down on overseas landlords avoiding tax and new research shows letters and campaigns have led to a 61 per cent increase in those admitting to not paying tax on their rental income.

In a further knock to landlords, the government has proposed abolishing the so-called ‘no fault’ Section 21 notices which give landlords the power to evict tenants at the end of their tenancy without a reason.

At the time, the National Landlords Association warned that any greater security for tenants would mean little if the homes to rent were not there in the first place.

Chris Norris, director of policy and practice at the NLA, said although an exodus of private landlords from the market could represent a windfall of sorts for the exchequer, he thought private property contributed far more to the UK economy when it was actively let than when it was disposed of as an asset.

He said: “Landlords’ taxable income from rent is generally taxed every year at 20 or 40 per cent depending on their income, whereas taxable gains are likely to attract only 18 or 28 per cent and are a one-off charge.

“In many cases, after an individual’s annual tax-free allowance, capital costs, and other deductibles are taken into account, it is likely that the tax raised by a typical property sale would be equivalent to only a year or two’s income tax.

“It would be far better for the government’s tax take to encourage landlords to keep trading, rather than sell up.”

By Imogen Tew

Source: FT Adviser

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Buy To Let Property Investors Optimistic About Future

Around two thirds of UK buy to let investors are optimistic about the future of the private rental sector, despite the challenges faced by landlords.

Furthermore, more than one in ten of these are ‘very’ optimistic when it comes to investment property growth and yields.

The findings come in the latest research by Cambridge & Counties Bank, which has highlighted that a significant number of landlords are using the current market volatility to grow their portfolios.

Due to the optimistic viewpoint held by landlords, nearly a fifth (19 per cent) are looking to grow their portfolios by a third and 11 per cent want to double it over the next three years. The research found that just 19 per cent of landlords are looking to sell.

While landlords are optimistic, Brexit remains the biggest uncertainty for property sector professionals with two fifths (40 per cent) of landlords conceding that it is top of their list of concerns.

Brexit is seen as a bigger risk than rising interest rates, a lack of confidence in the stability of lenders, and rising levels of tax, which were all cited by 32 per cent of landlords.

The student accommodation market was close behind the general private rental sector when it came to positivity, with a similar number (61 per cent) of landlords are equally optimistic about student accommodation in terms of growth, and 16 per cent ‘very’ optimistic.

Office buildings and commercial properties are viewed positively by two fifths (41 per cent) of those asked – though almost a third are not optimistic.

A significant number of landlords also say they will be refurbishing their buy to let and investment properties, with an average of £10,000 set to be spent. One in 10 (11 per cent) of respondents said they would spend more than £20,000, with 4 per cent forecasting they would invest more than £50,000 on their portfolio.

Chief Commercial Director of Cambridge & Counties Bank, Simon Lindley, said: ‘In spite of Brexit worries, it is great to see that the overall outlook for the commercial property sector is one of optimism.’

Source: Residential Landlord

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More overseas landlords admit tax avoidance

More overseas landlords are coming forward to admit not paying tax on their rental income after the government targeted suspected avoiders, new research has shown.

According to accountants and business advisers Moore Stephens, in the year to April 397 overseas-based buy-to-let landlords admitted to HM Revenue and Customs they had not been paying tax on the funds they received from tenants.

This was up 61 per cent on the 246 that came forward in the previous year.

HMRC has been targeting suspected tax avoiders with threatening letters alongside launching a ‘Let Property Campaign’, aimed to encourage landlords to voluntarily disclose that they had not paid the full amount.

Moore Stephens suggested HMRC’s mailshot to thousands of landlords suggested the government knew many of these buy-to-let consumers were not declaring the full tax they owed.

If landlords don’t respond within 30 days of receiving these letters from HMRC, they are liable to face penalties based on what HMRC believes they owe or criminal investigations for non-compliance.

HMRC is using its Connect database — which can cross-reference taxpayers’ details against estate agent client lists — to gather information on landlords, and it is estimated Connect now generates 80 per cent of the government’s tax investigations.

HMRC also access data from the Tenancy Deposit Schemes, Land Registry data and even social media profiles to cross reference buy-to-let landlords against people declaring rental income.

Jonathan Green, partner at Moore Stephens, said: “More and more landlords are starting to approach HMRC to avoid the risk of being hit with heavy sanctions further down the line.”

“HMRC is ‘offering the chance’ to landlords to bring their tax affairs up to date. However, the letters being sent out by HMRC make it pretty clear that it is threatening a full-blown investigation.”

Mr Green went on to say that while most landlords were aware they owed tax, many others just didn’t know what their responsibilities were.

He added: “In some cases, people have inherited buy-to-let properties and others think that because they are only making a modest profit it doesn’t count.

“It is very easy to make mistakes or get behind on your paperwork for a buy-to-let investment.”

Mr Green added that landlords must seek professional advice if they realised they had underpaid tax.

Carl Shave, director at Just Mortgage Brokers, said independent financial advisers and mortgage brokers needed to play their part in the process of landlords understanding their tax requirements as they had a duty to highlight these responsibilities to their clients.

He said: “HMRC are showing their continued intent for cracking down on tax avoidance and overseas landlords are no exception.

“Landlords are under increased pressure in regard to tax and legislation with numerous changes being introduced within the sector. However, ignorance is not an excuse in matters with such importance and property investors, professional and accidental alike, have a responsibility that goes hand in hand with property ownership.”

Mr Shave went on to say that if consumers were not familiar with the market or had concerns, they must look for professional advice wherever possible.

By Imogen Tew

Source: FT Adviser

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Landlords optimistic despite Brexit

Two thirds (64%) of landlords are optimistic about the outlook of the residential buy-to-let sector despite Brexit, according to latest research by Cambridge and Counties Bank.

The research found that more than one in 10 (13%) are “very” optimistic in terms of investment growth and yields.

Simon Lindley, chief commercial director, Cambridge & Counties Bank, said: “In spite of Brexit worries, it is great to see that the overall outlook for the commercial property sector is one of optimism.

“We remain very much focussed on supporting our clients with our comprehensive product suite and in doing so maintain our market leading level of customer satisfaction.”

Nearly a fifth (19%) are reportedly looking to grow their portfolios by a third and 11% want to double their portfolio over the next three years.

Brexit remains a key uncertainty for property sector professionals, with two fifths (40%) of landlords conceding that it is top of their list of concerns.

The research revealed that just one in five (20%) landlords said they were very confident of their lender’s stability.

Lindley added: “Cambridge & Counties Bank has seen a steady stream of borrowers switching from other lenders, often recommended by the intermediaries and brokers we work closely with on a daily basis.

“We are actively focussed on becoming the bank of choice for professional property investors and landlords.

“We will capitalise on the record set of results we posted for the financial year in 2018 and the momentum we have across the UK to grow our market share further.”

By Michael Lloyd

Source: Mortgage Introducer

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Bittersweet profits for buy-to-let landlords

Buy-to-let investors in the UK have suffered a dismal few years. The government’s determination to make the sector less appealing to investors seems to have worked.

As we pointed out in last week’s issue, the number of landlords in the UK has fallen by 120,000 in the past three years, according to figures from estate agent Hamptons International. Nevertheless, these landlords are leaving the sector with fairly significant profits. The average landlord in England and Wales sold their buy-to-let property in 2018 for £79,770 more than they paid for it (before tax), having owned it for nearly ten years on average.

Last year, 85% of landlords sold their property for more than they paid for it, with 15% making a loss. As you might expect, those selling property in London made a profit almost three times the national average, selling for a £248,120 profit. However, landlords made more money in 2017, selling for a £83,430 profit, with London landlords making £272,120. It’s also important to take into account the potential opportunity cost of leaving the sector.

Until a few years ago, buy-to-let was a fairly reliable source of income and capital growth for many. The government was concerned that landlords were pushing up prices beyond the reach of first-time buyers. While its clampdown has cooled the buy-to-let frenzy, it’s a shame that the Help to Buy programme is having the same effect.

By: Sarah Moore

Source: Money Week

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Number of landlords in arrears up 12%

The number of buy-to-let mortgage holders in significant arrears has increased by 12 per cent since last year, according to new data from UK Finance.

The trade body’s mortgage arrears and possessions update, published today (May 9), showed there were 1,200 buy-to-let mortgage properties in serious arrears — 10 per cent or more of the outstanding balance — in the first three months of 2019.

This was 12 per cent greater than in the same period in 2018.

The total number of buy-to-let mortgaged properties in any arrears, 2.5 per cent or more of the balance, increased by 3 per cent to 4,620 in Q1 2019.

The residential market fared better as the new data showed the number of homeowners in arrears remained at a historic low.

There were 76,580 homeowners in low level arrears in the first three months of 2019, down 4 per cent on the same period last year, and the number of consumers in serious arrears decreased by 3 per cent.

Arrears led to 1,380 residential properties and 570 buy-to-let mortgaged properties being repossessed in the quarter.

For the buy-to-let market, this meant repossessions fell by 14 per cent while for residential mortgages, the number of houses repossessed increased by 10 per cent.

UK Finance stated the increase in possession in the residential market had been driven in part by a backlog of historic cases and stressed that the total remained well below the levels seen between 2009 and 2014.

Commenting on today’s findings, Jonathan Harris, director of mortgage broker Anderson Harris, said: “Encouragingly, there has been a further fall in the number of homeowners in mortgage arrears, with numbers at historically low levels.

“The vast majority of borrowers are paying their mortgage in full and on time each month, perhaps not surprising when one considers how low interest rates are.”

But Mr Harris stressed there was no room for complacency in terms of mortgage repayments and said borrowers should plan ahead and consider how they would cope if interest rates were to rise.

Jeremy Leaf, north London estate agent and a former RICS residential chairman, said: “Buy-to-let landlords are falling into arrears from the pressure of tax and regulatory changes, as we might have expected.

“These figures also show that there is little appetite among lenders to repossess because they are not going to do too much better than the owners themselves in achieving a sale at a reasonable price.”

According to Mark Pilling, managing director at Spicerhaart Corporate Sales, the increase in buy-to-let properties in arrears could be down to the fact that many private landlords were looking to get out of the sector as a result of regulatory change.

This rise, he said, could be down to the fact that some tenants who have been given notice are now not making their rent payments.

He added: “In terms of residential mortgages, arrears are down slightly but possessions are up by 10 per cent, a fairly significant increase. And while they are still not at the levels seen after the financial crisis, they are slowly creeping up.

“And I think we will now see these residential possession numbers continue to increase every quarter, ballooning at the end of the year as borrowers start to run out of options to get themselves out of difficulty. And while forbearance is still an option for some, lenders need to look at all the circumstances of each customer and get the right strategy in place.”

In January, the Intermediary Mortgage Lenders Association warned the introduction of various tax and regulatory changes since 2015 would begin to have an effect on property availability and tenant choice in the rental sector as landlords began to feel the pinch of new regulation.

Landlords have been subject to a number of regulatory changes in recent years, with the introduction of an additional 3 per cent stamp duty surcharge on second homes in April 2016, which was closely followed by cuts to mortgage interest tax relief.

Buy-to-let borrowers are also now subject to more stringent affordability testing under the Prudential Regulation Authority’s tightened underwriting rules.

By Imogen Tew

Source: FT Adviser