2017 is set to be another challenging year for the buy-to-let market as the implications of the PRA regulations become clearer. As 2016 drew to a close there was a flurry of activity within the market as lenders announced their revised affordability requirements, confirming our expectations that sourcing buy-to-let mortgages will become more complex as a result of the changes.
Unsurprisingly, there is a good deal of variation in the approach taken by different lenders and landlords will need to be aware of this when researching the market for a buy-to-let mortgage. A number of lenders have adopted an income coverage ratio (ICR) of 145 per cent across their product ranges and are using the recommended minimum stress rate of 5.50 per cent or stressed product rate if higher. Lenders taking this approach include Barclays, Hanley Building Society and Natwest. Leeds Building Society has opted for a 140 per cent at 5.50 percent rental calculation for all applications except longer term fixed rates and ‘like for like’ remortgages which have a 5.00 per cent stress rate. Accord is using an ICR of 135 per cent and a stress rate of 5.50 per cent except for longer term fixed rates which are stressed at 5.00 per cent.
It is clear then that the landscape has changed significantly and the 125 per cent ICR, which has been so prevalent in the buy-to-let mortgage market during the last decade, has been retained only by those lenders that are looking to assess the tax status of their applicants and, in particular, where customers are identified as basic rate tax payers once the loan has been made along with limited company applications where these are allowed.
So far, so not so simple.
Let’s move onto some of the specialist lenders. Paragon Mortgages has kept a 125 per cent ICR for limited company applications and basic rate payers, but is applying a 140 per cent ICR for higher rate and additional tax rate payers. Like other lenders in the market, Paragon is using a stress rate of 5.50 per cent for all products except longer term fixed rates which have a stress rate of 4.00 per cent. To reflect the higher costs of managing more complex property Paragon requires a higher ratio for HMOs and multi-unit properties starting at 130% for basic rate tax payers and limited companies.
Similarly, Precise Mortgages has different ICRs for limited companies and basic rate tax payers (125 per cent), higher rate tax payers (145 per cent) and is applying a 160 per cent ICR for additional rate tax payers. The standard stress rate is 5.50 per cent and longer term fixed rates are being stressed at the pay rate.
Kent Reliance has not published different ICRs for tax status, but instead has created an ICR banding for portfolio landlords with 4 or more properties at 155 per cent and a banding for non-portfolio landlords with less than 4 properties at 140 per cent. Limited company applications require 125 per cent rental cover.
Aldermore has also taken an unusual position and is including alternative rental calculations for applicants using surplus personal income.
Property Hawk Mortgages has a dedicated buy-to-let sourcing system on its website which is available for landlords to use at no cost. We are currently in the process of creating a set of enhancements which will enable visitors to filter mortgages according to their tax status which should make sourcing more straightforward and help them to select suitable products.
Tel: 029 2069 5446
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