Leeds Building Society has made a number of changes to its buy-to-let lending criteria, including raising its interest coverage ratio to 140 per cent.
The society has bucked a trend of lenders increasing ICRs to 145 per cent and says its move from 125 per cent stress tests to 140 per cent for buy-to-let and holiday let mortgages is in line with its position as a “prudent and responsible lender”.
Several lenders, including Foundation Home Loans, Santander and TMW, have moved their ICRs to 145 per cent ahead of the implementation of the PRA’s tougher underwriting standards, which require lenders looking at rental cover requirements to demonstrate that they have taken all costs associated with the property into account, along with the borrower’s tax position.
The move follows the announcement that landlords will face reductions in mortgage interest relief to the basic rate gradually over four years, beginning next April.
Mortgages for Business chief executive David Whittaker believes standard ICRs are set to grow even further.
He says: “Most buy-to-let lenders have already increased their interest cover ratios for individual borrowers ahead of the 31 December deadline. The new standard ICR seems to be around 145 per cent, but I believe this may only be the start.”
He continues: “The correct mathematical solution from a taxation standpoint would be for ICRs to rise to 156 per cent and 167 per cent for higher- and high-rate tax payers respectively.
“This would be a ‘blunt edge’ for landlords, whose affairs are probably more three-dimensional than this simple position.
“In reality, however, I think we will see a period of reflection that could last several years, allowing lenders and landlords to digest all the changes that have happened since July 2015.”
Leeds’ affordability stress test rate under its new criteria is 5.5 per cent for purchase and capital-raising remortgages and 5 per cent where there is no additional borrowing.
The society has also removed the minimum income requirement, previously £25,000 for individuals or £40,000 for joint applicants.
Leeds chief commercial officer Richard Fearon says: “We believe the combination of an income coverage ratio of 140 per cent, a specific and lower stress rate for remortgages, no minimum income requirements and our market experience brings a unique proposition to the buy-to-let market.”
The changes will come into effect on 1 January 2017.