The Mortgage Works will be increasing the rental cover requirement rate from 125 per cent to 145 per cent for all buy-to-let mortgage applications.
Nationwide Building Society’s specialist arm will also be withdrawing from lending more than 75 per cent loan-to-value, so will no longer offer products at 80 per cent LTV.
The changes are in response to the forthcoming reforms of landlord tax relief, which will start to be phased in from April 2017. At present, mortgage interest is fully tax deductible, but from April 2020 tax relief on mortgage interest will be limited to 20 per cent, meaning higher tax rate payers will pay more tax, as relief is reduced to the equivalent level of a basic rate tax payer.
TMW is also putting detailed information on its website about the tax changes, including key implementation dates and how they may affect landlords. A calculator will also be available to indicate how the reduction in mortgage interest tax relief may have an effect on profit.
Paul Wootton, managing director of TMW, called this a pro-active move that recognises the need to help safeguard rental cover for landlords over the coming years.
He 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.”
The lender noted there will be no impact as a result of these changes for existing customers seeking a product switch or transfer of equity, providing no additional borrowing is involved.
It also explained prior to these policy changes being implemented, a customer achieving £10,000 in rent a year could borrow a maximum loan amount of about £160,000.
Increasing the rental cover requirement from 125 to 145 per cent will reduce this maximum loan by about £22,000 to £138,000, meaning a borrower will be required to increase their deposit by £22,000 to secure the property with TMW.
Alternatively, a customer seeking to borrow up to £160,000 (at 65 per cent LTV) will have to source a property that will yield an extra circa £130 in rent per month.
Rental cover ratio:
LTV | Stress Rate | Current Rental Cover | New Rental Cover |
Up to 65% LTV | 4.99% | 125% | 145% |
65% - 75% LTV | 5.49% | 125% | 145% |
A stress rate of 4.99 per cent will apply on all loans up to 65 per cent LTV or on fixed rate product terms of five years or more. A rate of 5.99 per cent applies where overall lending with the Nationwide Group is more than £1m.
TMW’s maximum loan will continue to be calculated using the higher of either the stress rate or product pay rate, against a rental cover position of 145 per cent, or 150 per cent for HMO applications.
Mark Harris, chief executive of mortgage broker SPF Private Clients, pointed out some lenders have already increased rental stress rates in response to tax relief changes but not to this extent. “For example, Nottingham Building Society increased its rental calculation this week from 125 per cent at 5 per cent to 5.5 per cent.
“Similar to interest-only lending in the years after the crunch, it is likely that other buy-to-let lenders will follow suit in a domino effect. It will make it much tougher for landlords to get the numbers to add up and careful consideration will need to be given before expanding portfolios or indeed investing for the first time.”
