Advisers currently recommending buy-to-let loans with 125 per cent rental coverage and the maximum loan-to-value (LTV) are creating mortgage prisoners, a lender fears.
Increasing numbers of lenders are demanding coverage of 145 per cent, up from the 125 per cent many used to ask for.
This move by lenders has reportedly been prompted by former chancellor George Osborne’s decision to restrict the amount of tax relief a landlord will be able to claim on mortgage interest to the basic rate.
Simon Bayley, commercial director of Foundation Home Loans, said as much as two thirds of the market could now be affected by the change in rental cover requirements.
He said: “What are you going to do if you take out a buy-to-let mortgage today and use the 125 per cent coverage and get the maximum loan-to-value (LTV) and maximum rate?
“If you are looking at the end of the two-year period to refinance, you are going to struggle at 145 per cent so you become a mortgage prisoner.
There is a real risk that people who have geared up to the maximum will find that when they come to refinance, they cannot do so. Ray Boulger“Advisers should be thinking more about this. If I am getting a buy-to-let mortgage and the adviser sold me a product that just gets me over the line but didn’t warn me about this, and after the two-year fix I am going back to find out about this information I have got a mis-selling issue.”
Ray Boulger, senior technical manager at John Charcol, estimated the proportion of the market demanding 145 per cent rental cover to offer a buy-to-let loan was probably closer to half, but said this was “clearly the direction of travel” that lending criteria was heading in.
He said: “This is very much a risk factor one needs to discuss with clients. There is a real risk that people who have geared up to the maximum will find that when they come to refinance, they cannot do so.
“They could get a product transfer from their lender but they are restricted in what they can have.”
Mr Boulger said the change in lender’s rental cover requirements has been prompted by the government’s changes to the tax relief that can be claimed by buy-to-let landlords.
From April 2017 mortgage interest tax relief for higher and additional rate tax payers in the buy-to-let market will be reduced.
The change restricts the relief that can be claimed to 20 per cent of mortgage interest payments and will be phased in over four years.
The Prudential Regulation Authority has predicted changes to interest coverage ratio (ICR) levels because of HM Treasury’s tax changes.
In its consultation on underwriting standards for buy-to-let mortgage contracts, which ended in June, the PRA stated most firms are in the process of developing new policies and procedures to take these additional costs into account.
The PRA stated: “The current industry standard is to set the minimum ICR threshold at 125 per cent.
“The PRA does not expect these proposals to reduce minimum ICR thresholds and furthermore, some of the factors above may lead to higher minimum ICR thresholds.”
The Mortgage Works, the specialist buy-to-let arm of Nationwide, has increased the rental cover requirement rate to 145 per cent for all applications, citing the new tax regime as the reason behind the change to lending criteria.
Paul Wootton, managing director of The Mortgage Works, said: “TMW already robustly assesses the affordability of its buy to-let mortgages against stress rates that are considerably higher than the borrower’s existing rate.
“The increase in the rental cover requirement is designed to strengthen this cashflow position even further, and help them withstand the impact of increased costs from the new tax regime.”
A spokesman for Royal Bank of Scotland said the company is currently reviewing its interest coverage ratio but is looking at measures to prevent mortgage prisoners, such as taking a customer’s personal income into account.
A Barclays spokesman said: “As a responsible lender, Barclays Mortgages wants to ensure that aspiring landlords can continue to meet all their financial commitments and are protected as they look to invest in buy-to-let over the long term.
“Customers will continue to complete a full income and expenditure assessment and we will continue to allow personal disposable income to make up any shortfall in the rental cover calculation.”
damian.fantato@ft.com
