Most lenders have heeded the PRA’s new guidelines, which means brokers have a lot of work to do to get up to speed
Anyone who still thinks the new PRA ‘guidelines’ for interest cover ratios and stress tests are non-mandatory is deluded. Hence, most buy-to-let lenders have published new rent-to-interest calculations. The result is a minefield of information, which will play havoc with BTL sourcing systems.
Our technical support manager has made a spreadsheet of lender RTIs before and after the PRA guidelines, for both personal and limited company borrowers. It shows that, post PRA, most mainstream BTL lenders have adopted a one-size-fits-all approach for landlords borrowing in a personal capacity, regardless of the individual’s tax bracket or the initial mortgage term.
The specialist lenders, and a few mainstream ones, have taken a more considered approach, offering different RTIs depending on tax code and initial product term. But while this will allow some landlords to borrow more personally against a specific property, they will have to provide more detailed information to prove they qualify for a lower RTI.
As an example, our lending brand, Keystone Property Finance, sets its standard RTI for products in the Classic Range for personal borrowers at 145 per cent at 5.5 per cent (or pay rate for five-year products) but will consider offering lower calculations to landlords who can show they are basic-rate taxpayers and likely to remain so.
But Paragon has taken the route of creating differing RTIs for different tax bands and properties:
- Basic-rate taxpayers/standard properties: 125 per cent at 4 per cent for five-year fixed rates; 125 per cent at pay rate + 2 per cent.
- Basic-rate taxpayers/HMOs: 130 per cent at 4 per cent for five-year fixed rates; 140 per cent at product rate + 2 per cent.
- Higher-rate taxpayers/standard properties: 140 per cent at 4 per cent for five-year fixes; 140 per cent at product rate + 2 per cent.
- Higher-rate taxpayers/HMOs: 145 per cent at 4 per cent for five-year fixes; 145 per cent at product rate + 2 per cent.
I assume the stress tests of pay rate + 2 per cent will equate to a minimum of 5.5 per cent in order to comply with the PRA guidelines.
Most RTIs for limited company borrowers have changed little, except for an increased stress test of 5.5 per cent for an initial term below five years. And most mainstream lenders have no products for corporate borrowers, even though the market is going that way.
Whatever the borrowing vehicle, most lenders have heeded the guidelines, which means brokers have a lot of work to do in ensuring they know where to go as each deal arises.
David Whittaker is chief executive at Mortgages for Business