In May 2016 TMW amended its minimum ICR to 145% and reduced the maximum loan to value (LTV) to 75%, in order to protect landlords ahead of the changes to landlord tax relief. The government has decided that mortgage interest, which in the past had been a fully deductible expense for tax purposes, would be no longer be treated in the same way.
Reductions in tax relief on mortgage interest are being phased in from April 2017 over four years. It will no longer be deductible from revenue and tax relief will be limited to 20%. This means that higher and additional rate tax payers will pay more tax as relief is reduced to the equivalent level of a basic rate tax payer.
Following the subsequent publication of the PRA supervisory statement on buy-to-let underwriting standards, TMW has now developed the capability to separate out ICRs for higher and lower rate tax payers.
With zero and basic rate tax payers remaining unaffected by the change in tax regulation, TMW is reducing the minimum ICR to 125% for new buy-to-let mortgage borrowers who can provide income proofs to support their lower rate tax status.
The maximum annual taxable income for lower rate tax payers is £45,000 in England and Wales and £43,000 in Scotland.
To qualify for the lower 125% ICR, the maximum portfolio size upon completion of the new application is set at three properties. There is no change to policy for landlords who meet the higher 145% ICR.
Product transfer stability
Paul Wootton, managing director of specialist lending, said: “We are taking steps to make sure that those buy-to-let borrowers who are paying tax at the lower rate see that reflected with appropriate measures of affordability.
“TMW, as part of Nationwide, already robustly assesses the affordability of its buy-to-let mortgages against stress rates that are higher than the borrower’s existing rate, and wanted to take a more flexible approach for those borrowers unaffected by the incoming tax relief changes.”
There will be no impact for existing TMW customers who are seeking a product switch or transfer of equity, providing no additional borrowing is involved.