How Specialist BTL is Supporting Self-Employed Borrowers Struggling with Affordability

For many landlords, the issue of affordability is one that continues to dominate conversation. As the Bank of England base rate remains higher than we have seen since early 2008, many looking to remortgage or purchase a new rental property may be faced with significantly higher costs and outgoings compared to what they’re used to, despite mortgage rates having fallen since the beginning of 2024.

As a result, attention is turning to how specialist lenders can ease some of these burdens for borrowers. Apart from rates and actually securing a buy-to-let mortgage, the key issue is ICR stress testing. With tougher underwriting standards introduced in 2016 by the Prudential Regulation Authority (PRA) and put into practice in 2017, the guidance acknowledged that the “current industry standard is to set the minimum ICR threshold at 125%” and that a variety of factors – including rental demand, the borrower’s property-related costs and any tax liability associated with the asset – “may lead to higher minimum ICR thresholds”. In some cases, this can rise to 145%, or even 165%.

The impact of higher stress testing

Introduced to safeguard against a high interest environment and to ensure borrowers aren’t going to default, the reality is that some applicants will struggle to meet ICR stress testing at 145% or 165%, against the higher rates now seen in the current climate.

Specialist solutions

With high street lenders often taking a computerised approach, specialist lenders are stepping in to support borrowers. Some are able to offer stress testing at 125% and others can take a more pragmatic approach to applications on a case-by-case basis. For example, manual underwriting allows for a hands-on approach, enabling lenders to take a common-sense view.

Specialist lenders have adapted to assist with ICR affordability offering products with higher fees and lower rates. While these have a higher initial fee, the borrower then benefits from lower monthly payments and a better ICR stress.

How a borrower structures their company should also be considered. Some borrowers are choosing to hold their properties under a limited company structure instead of owning them individually. Not just for convenience, this could allow them to offset mortgage costs against their tax bill.

Amidst all of this, it is vital that specialist lenders remain committed to supporting borrowers, including those who are self-employed. By assessing each case on its individual merits, we as an industry can continue to provide solutions for those who are struggling with affordability.

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For adviser use only. Please note this content has been supplied by our lender partner and as such, is their responsibility. No party shall have any right of action against Legal & General in relation to the accuracy or completeness of the information in this article.