OneSavings Bank has made a number of changes to its buy-to-let affordability assessments following recent rule changes.
From 28 December the bank’s minimum stress rate for rental cover purposes will be 5.5 per cent, or the initial pay rate plus 1.55 per cent, whichever is higher.
OneSavings Bank trades under the brands of Kent Reliance, InterBay Commercial and Prestige Finance.
The lender will also incentivise people to borrow towards a buy-to-let property through a limited company structure by demanding lower rental cover than people borrowing in their own name.
This means they will be able to borrow more against the value of the property.
Richard Wilson, OneSavings Bank’s group chief credit officer, said: “We have invested a significant amount of time and resource reviewing the new policy and our changes reflect a fair and equitable position for the markets we serve.
“Utilising the deep experience of our credit, risk and real estate functions, we analysed landlords’ property holding costs in different scenarios, factored in the new tax regime and delivered a rental stress that considers the net impact of market rent and interest rate rises.
“We believe what we have delivered is a robust and responsible revision to our policy in line with the new Prudential Regulation Authority rules.”
Among the new rules was a minimum affordability stress test rate for borrowers - the outside amount they would need to be able to pay - of 5.5 per cent for the first five years of the mortgage.
The rules followed concerns at the PRA about lenders’ growth plans, and the fact they might relax their underwriting standards to meet them.
To mitigate the additional tax costs they will face when tax relief is lowered on mortgage interest payments for individuals, landlords have increasingly turned towards incorporation, and borrowing through a company structure, where finance costs can still be offset against rental income.
Kent Reliance’s analysis showed there have already been more than 100,000 limited company loans issued in the first nine months of the year, double the total amount in the whole of 2015.
The new OneSavings Bank affordability assessments mean someone borrowing to buy a standard property – either a single dwelling or a house in multiple occupation (HMO) with up to five rooms – within a limited company structure will only need rental coverage of 125 per cent.
But a portfolio borrower – someone with four or more investment properties – trying to buy the same type of property in their own name will need coverage of 155 per cent.
The same two individuals buying a specialist property – a HMO with six rooms or more or a freehold block of land with five or more residential units – will need coverage of 145 per cent and 180 per cent respectively.