It is not the best time to be a buy-to-let landlord at the moment, with a raft of ‘anti-landlord’ policies being introduced by the government prompting concern that buy-to-let landlords with low profit margins could end up making a loss as a result of various tax changes, which will push some out of the market altogether.
The introduction of the 3% stamp duty surcharge in April, the scrapping of the 10% ‘wear and tear’ tax relief, the fact that mortgage tax relief is set to be phased out from next year, the need for landlords to now check the residency of their tenants, and now the Bank of England’s Financial Policy Committee will be granted greater powers over the buy-to-let market next year.
The list of negative changes in the sector goes on, and “it is clear that this will need to be reflected in lender affordability assessments”, according to John Heron, director of mortgages at Paragon.
“Government policy towards the private rented sector will increase costs for landlords,” he said. “The PRA’s supervisory statement released in September this year is helpful in ensuring that lenders approach this in a consistent fashion.”
Paragon is the latest in a long line of lenders making changes to its affordability assessment for buy-to-let mortgages to reflect the increase in costs that some landlords will face as a result of the changes to mortgage interest rate tax relief.
Paragon is introducing graduated interest coverage ratio (ICR) tailored to each landlord’s tax status in its affordability calculation.
The ICR will not change for landlords who are unaffected by the tax changes. So landlords paying basic rate income tax and corporate landlords will continue to be assessed at an ICR of 125%.
Landlords who pay a higher rate of tax, will have a higher ICR of 140% when assessing affordability.
Heron added: “The changes that we’re announcing are designed to tailor affordability to each landlord’s individual circumstances, whilst keeping the application process straightforward for brokers and their customers.”