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Bank of Ireland: Lenders will increasingly use personal income to subsidise BTL affordability – poll result

  • 10/12/2019
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Bank of Ireland: Lenders will increasingly use personal income to subsidise BTL affordability – poll result
The UK buy-to-let market has changed in recent years with a drive to encourage landlords holding larger portfolios meaning lenders have amended criteria to adapt and cater to their needs.


However, small portfolios are still a sizeable part of the market so Mortgage Solutions’ latest reader poll asked: For non-portfolio landlords with one to three properties, what is the key affordability measure you use when recommending a lender? 

Some 59.4 per cent of the brokers who responded said they used Interest Cover Ratio (ICR) and stress tests when checking a client’s affordability while 32.7 per cent relied on the mortgage’s interest rate. 

These options were by far the preferred ones as only four per cent used top-slicing to determine a non-portfolio landlord’s affordability, while two per cent used the length of the full mortgage term and a further two per cent said ‘other’. 


ICR required by most lenders 

The brokers who reacted to the results of the poll were on the whole unsurprised by the inclination towards using the ICR and stress test as an affordability measure. 

Iain Smith, head of intermediaries at Bank of Ireland UK says this is because “the key aspect of any buy-to-let transaction is the ability to pass the lender’s ICR stress rate”. 

Howard Reuben, founder of HD Consultants agrees that the results are to be expected as this affordability assessment is the starting point for most lenders when they determine whether they will consider a lending amount at all. 

As for the third preferred method, he adds: “Top-slicing is indeed a useful tool, but is not needed for most applications so the low poll is quite understandable.”

Charlie Walpole, mortgage adviser at Commercial Trust, accepts that while the affordability measure used for smaller portfolio landlords usually comes down to the ICR and stress test, it can vary case by case. 

Like the majority of respondents, Walpole says using ICR and looking at the mortgage’s interest rate is how he tends to check a client’s affordability as without those two measures, many applications would not fit within his firm’s coverage leading him to have to consider the next best provider. 


Other measures will rise

However, Bank of Ireland’s Smith predicts other forms of affordability will take precedence in the future as the market “remains challenged” following regulatory and government interventions which impact borrowers and lenders.  

He adds: “We anticipate that innovation will continue in affordability assessment by lenders with increasing use of personal income to subsidise affordability.” 

Smith suggests it is not always as straightforward as relying on the most common affordability measure, as it may also depend on the part of the country the non-portfolio landlord has their properties in. 

He says: “In some areas, especially in London and the South East, the rental yield tends to be significantly lower. In these regions, passing ICR is an increasingly important factor.” 


Significance of goals 

As for other factors which may determine which measure is used, HD Consultants’ Reuben says any conversations about affordability must be specific to each investor as their short-, medium- and long-term strategies will need to be taken into account.  

“Buy to let is a wealth creation investment and there does have to be a yield, but many investors are also looking for long-term capital growth,” he adds. 


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