For individuals, a new formula of 145% at pay rate or notional rate of 5.25%, whichever is higher, will be applied to term trackers and 3 year fixed rates. For borrowers, choosing a 5 year fixed rate, the pay rate will be used.
Stress tests for limited companies will remain at 125% of pay rate or a notional rate of 5.25%, whichever is higher, for term trackers and 3 year fixed rates. For limited company borrowers choosing 5 year fixed rates, the pay rate will be used.
Increasing stress tests for individual borrowers is expected to be the direction of travel for the buy to let industry in light of the forthcoming caps on finance costs and the proposals for stricter underwriting standards as set out in the PRA’s consultation paper (CP 11/16).
Commenting on the pending policy change, David Whittaker, managing director of Keystone said:
“We are keen to demonstrate that we take borrowers’ affordability extremely seriously and have been working on this criteria update with Paratus AMC for some weeks now.
“Crucially, individual borrowers who can show that they are basic rate tax payers now – and are likely to be in future – can ask for the lower stress test to be applied. These applications will be considered on a case by case basis. Our underwriters will assess the individual’s circumstances and portfolios very carefully and ask to see the last two years’ tax returns to prove that income is within the lower tax bracket limits.”
“The stress test for limited company applicants will remain at 125% of pay rate because corporate vehicles will not be financially affected by the new tax relief restrictions."
