ICR calculations
Another key issue according to Mendes will be interest coverage ratio (ICR) calculations.
He says: “It’s not a bad idea to look at ways to reduce your mortgage liability. For example, if you [allow] for mortgage overpayments on your portfolio this will reduce the portfolio LTV, which will allow you to access lower rates and minimise what you would pay back in the long term."
To overcome the ICR limitations when it comes to assessing borrowing, Mendes says he has seen some lenders introduce higher lender arrangement fees.
By increasing the arrangement fee, the lender can then offset a reduction in the fixed rate making the mortgage ICR more favourable. This allows the lender to still make a profit and the landlord to borrow at a cheaper rate.
With energy performance certificate changes around the corner, Mendes says it would be great to see lenders look to incentivise landlords with access to cheaper loans, or for portfolio landlords, reduced ICR calculations with portfolios C or above.
At R3 Mortgages, director Riz Malik says the firm has used the ‘top slicing' method on a number of occasions to help clients achieve their target loan requirements – something he says more lenders could use to help landlords with their financing requirements.
This involves assessing the landlord’s other forms of income to top up any shortfalls in the rental calculation.
Malik says this favours landlords with a lot of disposable income but not those who do not.
Reviving the market
According to Shave, two ways lenders can start to revive the BTL market is to first amend their stress levels for existing BTL loans.
A BTL loan approved 12 months ago based on stress rates at the time does not simply turn into a risk too high to take on simply because the very reason the stress tests were applied has occurred, for example, because interest rates have risen.
He argues that like-for-like remortgages should be looked upon with a more relaxed approach to stress testing.
Shave adds: “I also believe that lenders need to relax their rules of loan to rent ratios based on a borrower’s tax bracket.
“How much an applicant earns should not potentially penalise them. Just because someone earns more money should not mean they can borrow less simply because they are taxed more.
“This is made more of a mockery when the same higher rate tax payer can purchase through a limited company and can then potentially borrow more for the same property as their personal tax status is now regarded as null and void for underwriting purposes.”
