Split stress tests are the way forward
Ever since George Osborne's announcement last July, lenders have been considering what changes to make to reflect the future reduction of landlord tax relief.
Some lenders have increased cover rates slightly - but not nearly enough - and some have tried to offer split stressed tests depending on landlord experience and property location - completely missing the point about the potential reduction in future income.
As I write, only three buy to let lenders have announced appropriate action - an increase in their income cover ratios to individual borrowers.
Always a leader in the market The Mortgage Works was the first to break cover, upping its calculation to 145%.
As TMW only has products for personal borrowing it did not need to consider what stress to apply to limited companies which will not be affected by the pending restrictions to tax relief.
Our own lending brand, Keystone Property Finance was the second provider to announce changes to its stress tests – which will be applied to products within the Classic Range (funded by Paratus AMC) from 15th June 2016.
We have upped the calculation for individual applicants from 125% to 145% of pay rate or notional rate of 5.25% whichever is higher on our term trackers and three year fixed rates. For individual borrowers choosing five year fixed rates, the pay rate will be used.
Foundation Home Loans which is also funded by Paratus AMC made a similar announcement just a couple of days after Keystone.
Interestingly, both Keystone and Foundation will allow individual borrowers to use the lower stress test if they can show that they are basic rate tax payers on application, and are likely to be in future. Of course, our underwriters will assess these applications extremely carefully and ask to see the last two years’ tax returns to prove that income is within the lower tax bracket limits.
When TMW made its announcement, it was very disheartening to read so much negative reporting. The Telegraph’s headline on the story included the phrases “brutal criteria” and “mortgage crisis”. Even Mortgage Strategy – this much respected publication – ran with “thousands locked out of the BTL mortgage market”.
Whilst I would agree that the government has been singling out the buy to let market of late, to blame lenders for responding responsibly seems a bit harsh. And don’t forget there are alternative options for higher rate tax payers – namely using limited companies which are not subject to the pending tax restrictions.
Clearly, split stress testing is the direction of travel for lenders with products for corporate vehicles. And with the PRA Consultation Paper 11/16 due to be concluded next month, stricter underwriting standards for all will become the norm.
It will be interesting to see which of the mainstream lenders who currently only offer products to individuals, come to market with rates for limited companies. For now though, the specialist lenders are in a strong position.
Since the stamp duty deadline the market has taken a bit of a breather. I am expecting a mediocre second quarter with regards to new business levels.
I guess it will depend to some extent on the results of the forthcoming referendum.
We recently ran our Property Investor Survey and whilst the responses are still being analysed, it looks like an increasing number of investors are holding fire until the outcome is known. Maybe this will lead to more product innovation as lenders try to recover the position in Q3 – this would be a welcome move indeed.
You may also be interested in:
Why The Mortgage Works was right to increase its income cover ratio
Keystone to introduce split stress tests
Foundation Home Loans to increase buy to let stress test for individuals
Top 10 Best Buy to Let Mortgages for Limited Companies
17th May 2016
