Lenders have begun increasing calculations from the long-standing industry norm of 125% rental coverage of a notional interest rate of 5% to 5.5%.
Barclays went one step further and increased its rental coverage percentage to 135% after highlighting concerns that landlords’ affordability would be put under pressure because of tax changes announced in the Summer Budget.
But research from the Buy to Let Club shows that the average application received in Q4 2015 had a rental cover calculation of 163% at 5.5%. Managing director Ying Tan said this left landlords with plenty of breathing space, even at 125% at 5.5%.
Many lenders, including TSB, Paragon, TMW, BM Solutions and Godiva, have started calculating rental cover at 125% at 5.5% for products with LTVs of 65% and higher.
“This analysis shows that loan-to-values (LTVs) are sensible and rents are high enough to sustain the extra rent stress testing lenders are implementing. The analysis is nationwide, however the rent coverage is tighter in the south,” Tan said.
He added that Santander is the only mainstream lender that still operates at 125% at 5%.
In early December, Bank of England governor Mark Carney said he wanted the Treasury to give the Financial Policy Committee powers to order lenders to put limits on owner-occupier and buy-to-let lending through loan-to-value ratios, debt-to-income ratios and interest cover ratios.
In his Financial Stability Report, Carney said nearly 60% of buy-to-let borrowers would see rents fall below 125% of interest payments if interest rates increased by 300 basis points.
This is the amount at which mortgage lenders stress test owner-occupiers’ affordability.