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Tougher landlord stress tests split lending market

Tougher stress tests and underwriting standards polarised the buy-to-let market in 2017, according to Coventry Building Society.

Kevin Purvey, director of intermediaries at Coventry, said the more stringent regulatory standards from the Prudential Regulation Authority (PRA) had split the market into lenders that will lend to limited companies and those that will not.

The PRA brought in the tougher affordability guidelines on 1 January, which led most lenders to raise their interest coverage ratio – the amount of monthly income required to cover borrowers’ repayments – from 125 per cent to 145 per cent of the mortgage interest.

Then, on 30 September, the PRA told lenders to take into account the viability of borrowers’ entire portfolios when they apply for a new mortgage.

Landlords have also been hit by the government’s decision to phase out tax relief on mortgage interest by 2020.

Many amateur landlords have since stopped adding to their portfolios, while borrowing via a limited company has surged in popularity for those looking to avoid the scrapping of tax relief.

Mr Purvey predicted the tougher underwriting standards would have an impact on the market for years to come.

He said: “Lenders’ approaches to higher stress rates and new rules for lending to portfolio landlords have made the market more complicated for landlords and brokers.

“These changes have seen the market become increasingly polarised between those who will lend to landlords registered as a limited company and those who don’t.”

But while borrowing via a limited company allows landlords to claim tax relief, concerns have been raised that higher interest rates on some products could ultimately lead to them paying more than they would as an individual.

This could have implications for brokers if clients who have borrowed via a limited company complain about the advice they received.

Source: FT Adviser

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Bank stress tests: longer-term resilience of lenders to be revealed

For first time lenders including RBS have been tested on resilience over seven-year scenario and not just to economic shocks

The Bank of England is to reveal the damage inflicted on the UK’s biggest lenders from £30bn of hypothetical consumer loan losses, an economic downturn and a collapse in the pound.

Threadneedle Street’s latest health check on the sector – the first was conducted in 2014 – could have an impact on a bank’s ability to pay dividends and on its business models. The lenders could be forced to sell off assets or ask existing shareholders and bondholders for more cash if they fail the tests based on hypothetical scenarios intended to put the sector under severe stress.

The results will be published on Tuesday alongside the Bank of England’s latest assessment of risks to the financial sector against the uncertainty created by Brexit.

Royal Bank of Scotland, which is still 70% taxpayer-owned, will be closely watched after it failed the stress test a year ago, and because it is being readied for privatisation by the chancellor, Philip Hammond.

In last week’s budget, the Treasury said it wanted to sell off £15bn of its stake in RBS, which is worth about two-thirds of the bank’s current value, even though this would leave taxpayers with a £26bn loss.

As well as RBS, results will be published for Barclays, HSBC, Lloyds Banking Group, Standard Chartered, Nationwide Building Society and the UK arm of the Spanish bank Santander. All are holding more capital than before the credit crisis and their financial strength has been measured against a series of hypothetical scenarios, including a 4.7% fall in UK GDP, a 33% fall in house prices, interest rates rising to 4% and 27% fall in the pound.

Threadneedle Street has already warned that under the scenario lenders could incur £30bn of losses over three years through lending on credit cards, personal loans and car finance. On Tuesday, it is expected to become clearer how the £30bn is distributed among lenders and which lenders the Bank of England has demanded hold extra capital against these loans.

Each lender has its own pass rate and the Bank will announce how each has coped with the tests.

For the first time the lenders have been tested not only on their ability to withstand economic shocks. They have also been tested on an exploratory scenario that will examine banks’ resilience over seven years of weak global growth, low interest rates and high legal costs and fines for misconduct. It will also look at the viability of their business models.

RBS is facing the added uncertainty of a multimillion pound settlement with the US Department of Justice over the way the bank packaged up and sold mortgage bonds in the run-up to the financial crisis. RBS has said it wanted to reach a settlement for this residential mortgage bond securities (RMBS) scandal. On 23 December last year, the DoJ extracted $12.5bn in settlements from Deutsche Bank and Credit Suisse in relation to this toxic bond mis-selling scandal.

Gary Greenwood, an analyst at Shore Capital, said this so-called conduct risk could lead to a “technical fail” for RBS, which last year had to cut back on risks when it did not meet the hurdle rate.

Analysts at Royal Bank of Canada do not expect RBS to fail and point out Barclays has a higher hurdle rate and in last year’s tests had higher losses on consumer finance than average.

Source: The Guardian

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ASTL members up lending by 39% year-on-year

Association of Short Term Lenders firms (ASTL) increased the value of bridging lending by 38.9% in the third quarter of 2017 compared to the same quarter in 2016.

However lending saw a small fall of 2.7% from the second quarter of this year.

Benson Hersch (pictured), chief executive of the ASTL, said: “The figures from our members show that the bridging finance industry is in excellent shape.

“It shows that the industry has remained resilient despite the threat of Brexit and low growth in the economy.

“The figures also demonstrate that bridging loans remain an excellent alternative where traditional financing is not immediately available for customers.

“The bridging sector therefore continues to provide a vital role in the economy by offering customers access to the capital they need in a responsible and sustainable way.”

The value of their loan books stand at £3.5bn after rising by 27.7% from the end of Q3 2016 to Q3 2017.

Source: Mortgage Introducer