The Mortgage Works (TMW) is adjusting its Interest Cover Ratio (ICR) for lower rate tax payers by reducing the minimum ICR to 125% for buy-to-let mortgage applications.
Rental cover is expressed as a percentage of the mortgage interest and is designed to help protect a positive cashflow for buy-to-let landlords. Previously mortgage interest had been fully tax deductible, but reductions in tax relief on mortgage interest are being phased in from April 2017 and from April 2020 will be limited to 20%. This means that higher and additional rate tax payers will pay more tax as relief is reduced to the equivalent level of a basic rate tax payer.
In May 2016 TMW announced it was amending the minimum ICR to 145% and reduced the maximum loan to value (LTV) to 75%, in order to protect landlords ahead of the changes to landlord tax relief. Following the subsequent publication of the PRA Supervisory Statement on Buy-to-let Underwriting Standards, TMW has now developed the capability to separate out ICRs for higher and lower rate tax payers.
With zero and basic rate tax payers remaining unaffected by the change in tax regulation, TMW is reducing the minimum ICR to 125% for new buy-to-let mortgage borrowers who can provide income proofs to support their lower rate tax status. The maximum annual taxable income for lower rate tax payers is £45,000 in England and Wales and £43,000 in Scotland.
Paul Wootton, managing director of specialist lending, said: “We are taking steps to make sure that those buy-to-let borrowers who are paying tax at the lower rate see that reflected with appropriate measures of affordability. TMW, as part of Nationwide, already robustly assesses the affordability of its buy-to-let mortgages against stress rates that are higher than the borrower’s existing rate, and wanted to take a more flexible approach for those borrowers unaffected by the incoming tax relief changes.
“As a result, we are reducing the Interest Cover Ratio to 125% for new applicants who are not subject to the tax relief changes, which will enable them to borrow affordably while recognising the need to help safeguard rental cover for all landlords over the coming years.”
To qualify for the lower 125% ICR, the maximum portfolio size upon completion of the new application is set at three properties. There is no change to policy for landlords who meet the higher 145% ICR.
There will be no impact for existing TMW customers who are seeking a product switch or transfer of equity, providing no additional borrowing is involved.
