Challenger banks could look to raise prices or tighten criteria on their buy-to-let products as they look to improve profitability following regulatory changes, a report into the challenger bank market by KPMG has warned.
The buy-to-let market is a significant contributor towards the overall profitability of challenger banks accounting for approximately 15% of their balance sheets.
But a restriction on income tax relief, the scrapping of wear and tear relief and changes to stamp duty has led to speculation that the market could stall.
Additionally proposed changes from the Basel Committee could see a risk weighting premium added to buy-to-let mortgages has the potential to have a huge impact on the sector.
Should the changes be successful risk weights could increase for buy-to-let mortgages from 35% to a potential maximum of 120% depending on the underlying LTV.
This has led KPMG to warn that whilst buy-to-let may not be the Achilles heel of challenger banks it needs to be aware that the market is going to be “getting tougher”.
The report said: “It is easy to look at each of these changes in isolation and point to the mitigating factors – landlords changing to corporate structures, pointing to long-term returns on property.
“Challengers will need to be flexible in their approach to the market as a clearer picture of future demand emerges in the coming months.
“This could mean taking measures such as raising prices or tightening lending criteria to improve profitability and ROE. For some, it may be that scarce capital could be put to better use elsewhere in the business.”