The specialist lender is not going to impose a coverage ratio of 145% on all its customers, a decision taken by many buy-to-let lenders in response to the Prudential Regulation Authority’s (PRA) ruling that lenders must take into account borrowers’ affordability in light of changes to higher-rate tax relief.
Instead it will assess each application individually to establish if and how they have been affected by the tax relief changes. The level of coverage ratio will depend on the applicant’s circumstances, with a floor of 125%. This percentage will be coupled with the PRA’s prescribed interest rate of a minimum of 5.5%. Borrowers choosing a five-year rate will be assessed based on the interest rate of the mortgage product but additional underwriting checks may be required.
From April this year, tax relief will be tapered back from a maximum of 45% to 20%, irrespective of the tax bracket you fall within, over four years. At the same time, landlords will no longer be able to deduct the costs of finance from their rental income exposing more of their profit to tax.
However, not all buy-to-let investors will be affected by this change.
A survey carried out by brokerage Mortgages for Business during November found that 29% of professional landlords would not be impacted by the tax relief cuts.
Alan Cleary, managing director of Precise Mortgages, said if it used the 145% coverage ratio for all its applicants it would be turning away borrowers, unaffected by the tax changes, who would ordinarily have passed its affordability checks.
BM Solutions announced it would be adopting a similar tailored approach by the end of 2016.