Barclays’ decision to increase its rental cover ratio could see a ripple effect in the buy-to-let market, with other lenders following its lead, according to one mortgage broker.
Yesterday (30 November), the bank announced from 7 December, its rental cover ratio will increase from 125 per cent to 135 per cent for all new applications, as it expects landlords to incur higher costs because tax relief cut announced in the Summer Budget.
All existing background buy-to-let and permission-to-let mortgages will continue to be assessed at 125 per cent as part of the overall affordability calculation and the affordability rate will remain at 5.79 per cent.
In July, the chancellor stated tax relief for buy-to-let borrowers would be gradually tapered to the basic rate from April 2017.
A note from Barclays to intermediaries said the increase in rental cover ratio will ensure new customers are protected as they look to invest in buy-to-let over the long term.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said the bank is likely to be the first of many buy-to-let lenders to make this change to their lending criteria.
He said the industry is getting to the stage where buy-to-let is going to become a 50 per cent loan-to-value product in the south-east and London at least, taking the buy-to-let investor into the same space as a seasoned landlord.
Mr Harris said: “This means that if you are going to invest in property you won’t be leveraged at 85 per cent LTV, for example, which was commonplace during the boom, but will need to find a lot more equity.”
When combined with increased entry costs from April in the form of higher stamp duty for landlords, will increasingly exclude the small-time investor with a property or two in favour of larger investors with much deeper pockets, Mr Harris added.
“These developments are not good news for tenants as landlords will inevitably push up rents if they can to cover some of their higher costs and removal of some tax breaks.”
This morning, the Bank of England signalled it is ready to act to cool the buy-to-let market, with governor Mark Carney wanting the Financial Policy Committee to be given powers over the interest coverage ratio in buy-to-let calculations.