MortgagesJul 9 2015

Buy-to-let lenders forced to reassess affordability

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Buy-to-let lenders forced to reassess affordability

The Budget will force lenders to reassess their affordability calculation for buy-to-let mortgages, a broker has warned.

At the moment, John Charcol’s senior technical manager Ray Boulger, said most lenders require the rental income to be at least 125 per cent of mortgage payments, based on an interest rate of between 5 per cent and 6 per cent.

The 125 per cent cover is to allow for letting agents fees, voids and repairs, etc.

For higher rate taxpayers, he said the cost of the additional tax will now have to be considered in as well.

A difficulty for lenders will be that for basic rate tax payers the Budget has changed nothing, but higher rate taxpayers will see a very significant impact on their overall costs, explained Mr Boulger.

“Lenders will have to balance keeping their rental calculation simple, coupled with perhaps changing it, or requiring a higher level of cover for higher rate tax payers. However, it seems rather counter intuitive to offer a higher mortgage for any given rental income to borrowers with a lower earned income.

“Phasing in the additional tax charge over four years should mean that there will be no rush by higher rate taxpayers to sell their buy-to-lets but most will want to reassess the viability of their investment.

Mr Boulger said that for higher rate taxpayers, the greater the loan-to-value of their mortgage and the lower their rental yield, the more the changes will hit them and hence the more likely they will decide to sell when they deem it an appropriate time.

“Perhaps more importantly, the changes will make new buy-to-let investment less attractive for higher rate taxpayers.”

Simon Checkley, managing director of Private Finance, said it is logical that lenders will ultimately have to have criteria formulae for basic rate tax payers such as 125 per cent at 5 per cent and also such as 156 per cent at 5 per cent for 40 per cent payers because their net rental income will be 80 per cent of that of basic rate tax payers.

Long term, he said that buy-to-let investors may now decide to build their portfolio within a limited company structure, although there are financing (fewer lenders) and tax issues to be considered.

“Inevitably there will be upward pressure on rents as a result of these changes but no less demand among buy-to-let investors as this type of investment continues to look attractive,” Mr Checkley.

emma.hughes@ft.com