Rental income for these products must still cover 145% of the mortgage interest but will be stressed at 5% instead of 5.5%.
The 5.5% rate will continue to apply to fixed terms of less than five years.
Many lenders imposed an income coverage ratio (ICR) of 145% on all buy-to-let customers 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.
From this month, 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.
Not all landlords will be affected.
Some lenders, such as Precise and Clydesdale, have announced that they will assess applications individually to gauge the impact of tax relief changes on affordability, using 125% ICR as a minimum level.
Nigel Payne, managing director of TFC Homeloans, said the stress tests imposed by the PRA don’t apply to mortgages fixed for five years or more but some lenders have taken the easy option of applying the stress tests in a blanket fashion.
“Others have done a lot of analysis and have been able to reflect that in different ICRs and different rates according to the tax band of the individual, whether it’s an individual or limited company and the loan to value,” he said.
Payne added that lenders need to start competing in this area now the changes are in place.
“Nobody wanted to be an outlier but those sticking on a flat 145% for everybody are going to lose business. They need to get more granular with the analysis and rates and ICRs they are offering.”