Paragon tightens BTL affordability criteria in light of rule changes

From 12 December Paragon will assess landlords, who are deemed to be affected by the government’s changes to landlord tax relief, based on a higher income coverage ratio (ICR) of 140%.

Landlords paying basic rate income tax and corporate landlords will continue to be assessed at an ICR of 125%.

Paragon will also change the reference interest rate it uses to calculate affordability. For products with variable rates the reference or stressed rate will be set at 2% above product rate or 5.5%, whichever is higher. For longer term fixed rates the stressed rate will stay at 4% or the product rate if higher.

The move follows planned changes to landlord tax relief, which, will see the amount of relief awarded by the tax office gradually cut to 20% in 2020, rather than the highest rate of income tax. This means it will mainly affect people on higher tax rates.

The Prudential Regulation Authority (PRA) has already mandated all lenders to implement the tougher stress-tests from January.

Director of Mortgages John Heron (pictured) said, “Government policy towards the private rented sector will increase costs for landlords and it is clear that this will need to be reflected in lender affordability assessments.

“The PRA’s supervisory statement released in September this year is helpful in ensuring that lenders approach this in a consistent fashion.

“The changes that we’re announcing today are designed to tailor affordability to each landlord’s individual circumstances, whilst keeping the application process straightforward for brokers and their customers.”