Specialist lender Paragon is refining its mortgage affordability criteria for buy-to-let landlords, ahead of landlord tax changes next year.
From 6th April 2017, some landlords will face higher costs as a result of the reduction in mortgage interest tax relief.
Paragon Refines Mortgage Affordability Criteria Ahead of Tax Changes
While the tax changes will only be gradually introduced from April next year – and will not be fully implemented until April 2020 – Paragon is refining its affordability assessment now to ensure that its loans remain affordable in the future.
The lender is adopting an approach that seeks to assess the tax status of individual landlords and reflect this in the affordability calculation.
As a result, the interest coverage ratio (ICR) will not change for landlords who are unaffected by the tax changes. Those paying the basic rate income tax and corporate landlords will continue to be assessed at an ICR of 125%. If a landlord will be paying a higher rate of tax, an ICR of 140% will be used.
This revised approach to affordability also includes changes to the reference interest rate used in the affordability calculation. For all products other than longer-term fixed rates, the reference (or stressed) rate will be set at 2% above the product rate or 5.5%, whichever is higher.
For longer-term fixed rates, the current stressed rate of 4% or the product rate, whichever is higher, will be used.
All applications will continue to be subject to a background, forward-looking affordability assessment to ensure that products remain affordable when a fixed or discounted rate term comes to an end.
The Director of Mortgages at Paragon, John Heron, explains the need for the revised approach: “Government policy towards the private rented sector will increase costs for landlords, and it is clear that this will need to be reflected in lender affordability assessments.
“The Prudential Regulation Authority’s supervisory statement released in September this year is helpful in ensuring that lenders approach this in a consistent fashion.
“The changes that we’re announcing today are designed to tailor affordability to each landlord’s individual circumstances, whilst keeping the application process straightforward for brokers and their customers.”