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Monday, June 06, 2016

Rent stress tests and respite for limited companies

In recent weeks we have seen a number of buy-to-let lenders make changes to their rental calculations and thereby imposing more stringent tests on landlords’ affordability. The Mortgage Works (TMW) was the first to increase its rent stress test from 125 per cent to 145 per cent in what appears to be an early response to the PRA’s proposals for further regulation of the buy-to-let mortgage market.

Following TMW’s lead, Newcastle Building Society and Woolwich quickly followed suit, Foundation Home Loans announced its intention to do the same and we may see more lenders making changes in the coming weeks.

Raising rental calculations is a rational decision by lenders as the impending tax relief changes being phased in from 2017 will certainly affect the profitability of many buy-to-let property businesses in the UK. A 145 per cent rental calculation is a realistic allowance to cover all landlords’ costs and the lower tax relief, however we may see some lenders developing their own approaches to affordability tests that take other factors besides rental income into consideration.

There is justifiable concern among industry pundits that if such rent stress test increases are seen across the buy-to-let mortgage market, it will become more difficult for landlords to purchase new properties especially in areas such as London and the South East where rental yields can be lower than in other parts of the UK.

Although we are likely to see the trend continue, we may find some lenders looking to create a competitive edge in the market not by offering lower rates, but by requiring lower rent stress yields. For example, New Street Mortgages is a new entrant to the buy-to-let mortgage market and currently has a 115 per cent at pay rate calculation for properties in Central London.

Although the tax relief changes and increasing rental calculations are not good news for landlords, there may be opportunities to avoid such measures by using a corporate structure to purchase and hold buy-to-let properties. Limited companies are not subject to the tax relief changes and with corporation tax being reduced to 17 per cent by 2020, they could provide a more financially viable way to invest in buy-to-let. Landlords considering using a limited company for their buy-to-let business should seek advice from a qualified tax expert before doing so.

In the coming months we may see more lenders taking a different stance towards rent stress tests for limited companies. For example, Foundation Home Loans is only increasing its rental calculation to 145 per cent for personal buy-to-let applications. Limited company applications will remain subjected to the current 125 per cent rental coverage ratio.

The good news for landlords who are looking for a limited company buy-to-let mortgage is that there is a growing number of products to choose from and a wider choice of lenders. Many of these lenders including Aldermore, Axis Bank, Fleet Mortgages, Foundation Home Loans, Paragon Premier and Precise have 125 per cent rental calculations.

For landlords looking for longer term fixed rates for a limited company, there are a number of five year fixed rates below 5.00% available that have 125 per cent at pay rate rental calculations.


  • Axis Bank – 4.59% 5 year fixed with 2% completion fee up to 75% LTV. Rental calculation of 125% at 4.59% 
  • Foundation Home Loans – 4.39% 5 year fixed with £1999 completion fee up to 75% LTV. Rental calculation of 125% at 4.39%
  • Precise Mortgages – 4.59% 5 year fixed with 1.5% completion fee up to 75% LTV. Rental calculation of 125% at 4.59% 

The buy-to-let market is undergoing changes in response to the government’s apparent clamp down on the sector, but landlords are likely to adapt to the new environment and find ways to make their investments work. Buy-to-let will prove its resilience and continue to be an important part of the UK housing market.

- Jane Simpson at Property Hawk Mortgages

Tel: 029 2069 5446



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