TMW ups income cover ratio ahead of tax relief changes

Ahead of the government’s revisions to buy to let tax relief, which come into play next year, The Mortgage Works (TMW) has upped its buy to let rental calculation and is lowering its maximum loan to value (LTV).

From 11 May, TMW’s rental coverage requirement is to be increased from 125% to 145% and its maximum LTV will be lowered from 80% to 75%.

The lender will continue to calculate its maximum loan amount using the higher of either the stress rate or product pay rate.

In a note to brokers, TMW says it is making these revisions ‘in order to help landlords safeguard positive cash flow, as future tax relief changes begin to phase in from next year (April 2017)’.

Currently, mortgage interest is fully tax deductible but from next year the higher rate of mortgage interest relief is to be withdrawn gradually over a four-year period and reduced to the basic rate of income tax.

Commenting on the changes, David Whittaker, managing director of Mortgages for Business, said:

“I'm not surprised. This is the direction of travel for the sector and I've been on the road in recent weeks attending trade show for brokers and investors forecasting that lenders would start to increase their income cover ratios for individual borrowers.

“As one of the biggest mainstream buy to let providers, TMW is taking the lead and demonstrating to the market and the regulators that it truly understands the forthcoming tax relief changes. It will be interesting to see how other providers react. I anticipate a few will be making similar preparations, some will wait until the outcomes of CP11/16 are known and others will bury their heads in the sand.

“Interest cover ratios on products for limited companies will remain generally the same as they are now because these borrowing vehicles will not be subject to the new tax relief restrictions. Indeed, it will be the lenders with products in this category who will be the likely winners out of this in the long term.”

Currently, TMW does not offer buy to let mortgage products to limited company borrowers.