Why The Mortgage Works was right to increase its income cover ratio

In typical TMW style, the second largest buy to let mortgage lender has again led the way - this time in reacting to the up and coming tax relief changes for landlords.

Pre crunch, I remember The Mortgage Works pulling out of the new build market with what turned out to be wise foresight; and I remember TMW being the first to return to 80% lending when the recovery started.

I remember blogging enthusiastically when they were the first to launch a viable 10 year fixed rate product to the BTL market and here we are again with TMW leading the way in a difficult but necessary change to the assessment of BTL mortgages.

The lender's decision to increase the rental cover to 145% from 125% reflects the fact that with effect from April 2017, high rate tax paying landlords will start to see a reduction in tax relief on their mortgage interest.

This is all about responsible lending and one of the largest buy to let lenders being pro-active at a time when the spotlight is firmly on underwriting standards.

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.

Following TMW’s announcement, it is likely that others will follow suit quite quickly.

Lenders offering products to limited companies will be able to continue with current stress tests but will need to consider increasing the stress test for individuals.

The lenders who are more curious about the landlords’ income and tax position will be able to consider having further split stress tests for high and basic rate tax payers - this will play into the hands of the more specialist lenders with the mainstream lenders making a “one size fits all” stress test for individual borrowers.

I have been disappointed by the negative reporting following TMWs announcement with headlines such as "Brutal criteria", "Mortgage Crisis" and "Thousands locked out of the BTL mortgage market".

Those that know me well know that I don't do negative and as a specialist broker in this market I can only see the positives, with landlords more than ever needing help in a complex mortgage market.

Lenders will continue to innovate and criteria will evolve. We will see more lenders willing to take outside income into account when assessing affordability.

We will also see a continued drive towards limited company transactions and in turn, an improvement in product availability and pricing.

And more landlords will look to five year fixed rate products where the stress tests will be more favourable.

Regular readers will know that we have been banging on about five year fixed rate buy to let mortgages for a couple of years now. Landlords looking to gear up for further investments will now be seriously looking at these products.

The move by TMW to increase the stress test was inevitable and anyone crying foul hasn't really considered the bigger picture here.

Other lenders will follow and with the PRA Consultation Paper 11/16 due to be concluded in the summer, this may well be a necessary stepping stone on the way to stricter underwriting and stress tests going forward.

What I am confident of is that regardless of the forthcoming changes, the buy to let mortgage market will continue to evolve and life will go on...

You may also be interested in

What the Spring Budget 2016 means for landlords and investors

Summer Budget 2015 and the implications for landlords

FAQs on buy to let mortgages for limited companies

TMW ups income cover ratio ahead of tax relief changes


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