Affordability tests are being applied by some lenders in the residential market in a way similar to that used in specialist BTL
Welcome to Specialist Watch: a new column aimed at addressing issues and developments in the specialist residential and BTL lending sectors.
Specialist lending is a term that means different things to different people. For clarification, this column will cover subjects relating to most types of lending other than mainstream mortgage lending. Adverse lending in both the residential and BTL markets, specialist mortgages for the self-employed and those with unusual income streams, and loans for investment property, HMOs, multi-units and expats will all be covered in the coming months.
So, a new year, a new column and new developments. I have been particularly interested in the way affordability tests are being applied by some lenders in the residential market, which is similar to the approach adopted in the specialist BTL sector.
Let me explain. Brokers know that, when it comes to BTL mortgages, lenders must apply the new PRA stress test that says a notional rate of 5.5 per cent must be used for assessing affordability to ensure borrowers could cope with future interest rate rises. However, if a deal is based on a five-year fixed rate or longer, this notional rate does not apply.
The stress test can be conducted using the pay rate, so the client can borrow more. Until recently, few lenders carried this approach across into the residential market but we are seeing it more often.
The difference to the amount that may be borrowed can be significant. Take, for example, the following deal based on a single applicant earning £50,000 a year with no dependent children, who is purchasing a house using Dudley Building Society’s five-year 2.89 per cent fix available via 3mc.
When stress tested at the pay rate, a maximum loan of £295,000 is achievable. This is £65,000 more than a very similar deal based on Dudley’s 2.89 per cent three-year discount, which enables a loan of just £230,000 when stress tested using a notional rate.
Keeping up to date
Knowing which specialist lenders can help borrowers with non-standard requirements is important for all brokers. However, if a broker deals with specialist cases only occasionally, it can be hard to keep abreast of each lender’s products. So here is a brief summary of what is currently around:
- Pepper Homeloans is offering two-year fixed rates (but for 30 months) from just 2.93 per cent. It does not credit score and offers residential and BTL deals for those with impaired credit (including the recently self-employed).
- Magellan Homeloans has two new ranges and has cut its fixed-rate pricing by up to 0.5 per cent, with rates from 3.1 per cent. Magellan specialises in helping borrowers rejected by high-street lenders and accepts arrears, CCJs, defaults, IVAs and bankruptcy, provided there is a clean credit record for the past 12 months.
- Dudley Building Society has recently enhanced its criteria, including changes to income requirements and credit history. It has no maximum end-of-term age for either residential or BTL loans.
- Aldermore has reduced rates on many owner-occupied products and launched high-LTV mortgages (up to 95 per cent) for clients with low deposits. This replaces the recently closed Help to Buy mortgage guarantee scheme.
- Precise Mortgages has adopted basic, higher, additional, limited company and bespoke income coverage ratio tests, which range from 125 per cent to 160 per cent. Precise provides tailored ICRs dependent upon circumstances.
- Axis Bank is taking a pragmatic approach to the new PRA requirements. ICRs start from 125 per cent with five-year fixed rates at pay rate from 3.99 per cent with only a three-year ERC period.
- Kensington launched into the HMO market in Q4 2016 and is offering multiple units on one title via its specialist distributor range.
- Paragon Mortgages has new minimum affordability tests based on the applicant’s tax status, with limited companies starting from 125 per cent at 4 per cent. Paragon also launched its Premier Range last year, which is available via a limited number of distributors.
The new PRA rules will create opportunities for brokers as there are far more factors to consider when contemplating how best to finance the acquisition of additional property.
As for the residential market, more products are coming on stream for people with specialist requirements and many borrowers will be unaware of their availability.
Doug Hall is director of 3mc