The knock on effects from the upcoming changes in tax regime are becoming apparent, as a number of lenders, including TSB, Mortgage Trust and Paragon, revise their buy to let affordability calculations.
As predicted by industry experts, the introduction on the 1st April 2016 of a three percentage point stamp duty surcharge on purchases of additional residential property is slowly starting to effect the way the buy to let sector operates.
This week, Mortgage Trust and Paragon Mortgages increased their interest coverage ratio (ICR) to 5.35%, for single self-contained property applications in a bid ‘to build further sustainability into their loan book’ a statement from the lender said.
The new range from Mortgage Trust includes a two year fixed rate at 3.05% available up to 75% LTV and 3.45% at 80% LTV. A five year fixed rate product at 3.70%, available up to 75% LTV is also now on offer.
Paragon Mortgages has made adjustments to its products to reflect the changes in ICR, effective from 11th January.
For example, gross rental income from a single self contained unit (Individuals) is subject to a minimum of 125% of an interest only payment, calculated at 5.35% (or product charging rate if greater).
House in Multiple Occupation (HMO) and limited company applications for Paragon Mortgages will see no changes in ICR calculation.
As such the gross rental income from single self contained unit (Limited Company) is subject to a minimum of 125% of an interest only payment, calculated at 5% (or product charging rate if greater).
The gross income from an HMO / multi-unit block is subject to an absolute minimum of 130% of an interest only payment, calculated at 7%.
Meanwhile, TSB, as reported on yesterday, is increasing the rate of interest it uses in its buy to let affordability calculation from 5% to 5.5% as from Tuesday 12 January.
The new rate of 5.5% will apply to mortgages over 65% loan to value (LTV). Mortgages which are less than or equal to 65% LTV will be assessed against the notional rate of 5%.
Applications which are currently being processed, including decision-in-principles that were submitted before 8pm on 11th January, will not be affected unless the application does not proceed and is then submitted at a later date.
David Whittaker, Managing Director, Mortgages for Business, said:
“The knock on of the proposed tax changes to mortgage interest relief will be lenders introducing different stress tests for individual and limited company borrowers.
For limited companies, I expect that the rental cover calculations will stay broadly the same as they are now. However, for individual borrowers the stress test will get much more bracing because the individual’s ability to offset costs over time will be reduced.
From 2017 onwards the tax liability will step up year on year until 2020.”
You might also be interested in:
27.07.2015 Buy to let - from personal to limited company ownership
Prior to now, when asked by clients whether buy to let properties should be bought in their own names or whether they should use a limited company we have always said “it all depends”. Well the Summer Budget 2015 has altered everything and whilst the answer is still “it all depends”, the balance has shifted markedly in favour of limited companies.
26.11.2015 February will be too late
What does the 3% stamp duty surcharge mean for landlords looking to finance buy to let property? Steve Olejnik gives his opinion and shines some light on possible routes forward.
26.11.2015 George hits buy to lets with 3% stamp duty surcharge
David Whittaker, MD at Mortgages for Business looks at the effects of the 3% stamp duty surcharge on buy to let properties and the restrictions of mortgage interest relief on landlords' portfolios. In essence his advice is to act now and not to wait until the new year.