BTL rental cover rise could spark ‘domino effect’

BTL rental cover rise could spark ‘domino effect’

More lenders are likely to copy a recent move to demand higher rental incomes for buy-to-let (BTL), leaving many landlords unable to get or renew mortgages, industry experts have warned.

Last week, Nationwide Building Society’s specialist arm The Mortgage Works (TMW) announced that its rental cover rate would rise from 125 per cent to 145 per cent for all BTL mortgage applications. It will also stop lending more than 75 per cent loan-to-value.

Brokers and lenders said it could mark the first of many similar moves ahead of reforms which will introduce a 20 per cent limit for tax relief on BTL mortgage interest, phased in from next April.

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Currently, mortgage interest is fully tax deductible, but from 2020 higher-rate taxpayers will pay more as relief is reduced to the equivalent level of a basic-rate taxpayer.

London & Country associate director David Hollingworth said a review by the Prudential Regulatory Authority into BTL lending was another likely cause behind TMW’s decision.

He said: “It puts the onus on affordability for landlords in the longer term, so there was always likely to be further tightening of rental calculations.”

The Prudential Regulation Authority consultation could also see the regulator lean on mainstream lenders to improve their standards, said Bob Young, chief executive of BTL specialist Fleet Mortgages.

He said: “Brokers will be horrified by this trend, but this is great news for lenders doing proper underwriting, as it means the mainstream will be brought up to our level.

“Standards in underwriting have really slumped with some new lenders.”

Pete Muglestone, director of Online Mortgage Advisor, backed TMW’s move, but said landlords may get “trapped”, as they did when the Mortgage Market Review banned self-certification.

He said: “With 125 per cent coverage having been pretty standard across the industry for the past few years, borrowers have taken interest only loans to this amount.

“Without reducing their balances, an increase in affordability to 145 per cent could leave many unable to switch lender.”

But Nick Green, a broker at Alternative Estates & Financial Services, said most lenders have been quietly increasing their criteria by using 125 per cent at a pay rate of 5.5 per cent instead of 5 per cent.

“With the increase in rent over the past two years, it will have little affect on the market other than prime high-value properties.”