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Buy-to-Let Watch: Stricter underwriting is set to become the norm

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Only five lenders to date have announced appropriate action in response to the planned cut to landlord tax relief

Ever since George Osborne’s announcement last July on the planned reduction of landlord tax relief, lenders have been considering what changes to make in response.

Some have increased cover rates slightly while others have offered split stress tests depending on landlord experience and property location, missing the point about the potential cut in future income.

As I write, only five buy-to-let lenders have announced appropriate action: an increase in income cover ratios for individuals. TMW was first, upping its calculation to 145 per cent.

Our lending brand, Keystone Property Finance, was next to announce changes to stress tests, which will apply to products in the Classic Range from 15 June. We have upped the calculation for individuals from 125 per cent to 145 per cent of pay rate or a notional rate of 5.25 per cent, whichever is higher, on our term trackers and three-year fixes. For individuals choosing five-year fixes, the pay rate will be used. Foundation Home Loans made a similar announcement a few days later.

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Both Keystone and Foundation will let individuals use the lower stress test if they can show they are basic-rate taxpayers on application and are likely to be in future.

Then Barclays announced a rise in its rental cover ratio from 135 per cent to 145 per cent but also a cut in its stress rate from 5.79 per cent to 5.5 per cent from 26 May.

Newcastle Building Society has also increased its rental coverage ratio.

When TMW made its announcement, the negative reporting was disheartening. One national newspaper’s headline included the phrases “brutal criteria” and “mortgage crisis”. Even Mortgage Strategy ran with: ‘Thousands locked out of the BTL mortgage market’.

While I agree the Government has been singling out the buy-to-let market of late, to blame lenders for responding responsibly seems a bit harsh. And do not forget the alternative options for higher-rate taxpayers – namely using limited companies, which are not subject to the pending tax restrictions.

Clearly, split stress testing is the direction of travel for lenders with products for corporate vehicles. And, with the PRA’s 11/16 consultation paper due to be concluded next month, stricter underwriting standards for all will become the norm. It will be interesting to see which mainstream lenders that currently offer products only to individuals come to market with rates for limited companies.

The market has taken a breather since the SDLT deadline and I expect a mediocre Q2 for new business.

It will depend to an extent on the result of the EU referendum. We recently ran our Property Investor Survey and, although the data is still being analysed, it looks like investors are holding fire until the outcome is known. Maybe this will bring more product innovation as lenders try to recover in Q3.

That would be very welcome.

David Whittaker is managing director at Mortgages for Business

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  • Chris Hulme 25th May 2016 at 12:40 pm

    For lenders it is probably a question of whether they feel it is necessary to increase the margins on this. Interesting take on basic rate tax payers having a lower calculation to consider – somewhat counterintuitive isn’t it to lend more to a lower earner?
    Personally I think Coventry have the measure with 125% of 5% below 65% ltv or 5year fixed or longer. Only above 65%ltv does the margin need to cover a greater amount on products of less than 5 year fixed.
    It’s another element where lenders can compete on criteria now that the rate competition has all but dried up….