In the run up to commencement day for the Renters’ Rights Act, one question has come up repeatedly in conversations with brokers and landlords – will lenders tighten buy-to-let underwriting because the rules of the rental market are changing?
It is an understandable concern.
The legislation asks landlords to operate differently in areas that matter day-to-day, and nobody underestimates the adjustment this will require.
But it is important to separate operational change in the lettings market from the fundamentals of mortgage risk assessment.
We do not believe the Act has a direct impact on underwriting, and we do not believe that other lenders are shifting approach either.
We have completed a gap analysis across the various measures in the Act to understand what could, in theory, change landlord behaviour and where risks might emerge.
The conclusion, at this stage, is clear. There are practical implications for landlords to consider, but no reason to rewrite how we assess affordability, security and borrower strength.
Start with affordability. Rental income coverage is not a “nice to have”. It is framed by minimum standards set out by the PRA, and those standards still apply. Whatever the legislative backdrop, lenders must continue to ensure loans are affordable against sustainable rental income assumptions.
That is where our approach is designed to be resilient.
When we assess a property, we do not anchor ourselves to a snapshot of the passing rent on the day.
We use our internal surveying capability to look at market comparables, what is happening in that local area, what is achievable and what feels supportable over the longer term. In other words, we already underwrite with an eye on income durability.
For portfolio landlords, our lens is wider still. At Paragon we often work with portfolio landlords, or those who aspire to grow, and when underwriting applications, we do it holistically.
We consider the landlord’s wider portfolio and broader business strategy, including whether they are focused on yield today or capital appreciation over the longer term. Having more properties means multiple sources of rental income and any voids are, to some degree, absorbed across the wider portfolio.
We also recognise that individual properties will perform differently at different times, and professional landlords manage that risk across the whole.
So what changes might we expect landlords to make, even if underwriting does not?
One likely shift is a more deliberate approach to rent reviews. Many landlords, particularly those with long-term tenants, do not automatically increase rents in line with inflation every year. They value stability and avoid creating a void over a modest uplift.
Our research shows the new framework may encourage more landlords to be more consistent about annual reviews because they will want to use the windows available to them. They also intend to be more selective over prospective tenants to reduce the risk of a lengthy eviction process.
Many landlords largely have positive relationships with their tenants and do what they can to keep good ones, limiting rent rises where possible and investing to keep properties up to a good standard.
Some of the measures set out in the Act should strengthen those relationships and support consistently good quality, affordable homes across the PRS, reducing the need for tenants to move.
Landlords may not like every aspect of reform, but they will adapt, as they have adapted to every major shift in the sector over the years.
Our job, as a lender, is to keep assessing each case sensibly, keep listening to brokers and landlords, and keep monitoring how the market responds.
If evidence emerges that requires change, we will respond, but, right now, the message is simple.
No change in assessment, no change in approach and no loss of focus on the fundamentals that protect borrowers, tenants and lenders alike.
Lisa Steele is Mortgage Lending Director at Paragon Bank
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