Paragon is increasing its interest cover ratios for landlords in the higher-rate tax band from 125 per cent to 140 per cent.
The lender is making the changes ahead of the increase in costs for landlords when the mortgage interest rate tax relief changes come in next April.
The changes come in on 12 April.
A Paragon statement says: “Whilst the tax changes only start to be implemented in April 2017 and will not be fully reflected in landlord’s costs until 2022, Paragon is refining its affordability assessment now to ensure that loans remain affordable into the future.”
Landlords paying basic rate income tax and corporate landlords will continue to be rated at Paragon’s current level of 125 per cent.
The lender is also changing its reference interest rate used in the affordability calculation.
For all products other than longer term fixed rates, the reference or stressed rate will be set at 2 per cent above product rate or 5.5 per cent, whichever is higher.
For longer term fixed rates the current stressed rate is 4 per cent or the product rate if higher.
Paragon director of mortgages John Heron says: “Government policy towards the private rented sector will increase costs for landlords and it is clear that this will need to be reflected in lender affordability assessments.
“The PRA’s supervisory statement released in September this year is helpful in ensuring that lenders approach this in a consistent fashion.
“The changes that we’re announcing today are designed to tailor affordability to each landlord’s individual circumstances, whilst keeping the application process straightforward for brokers and their customers.”