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 borrowers, brokers and specialist lenders have warned, leaving many landlords unable to get or renew mortgages.

Nationwide Building Society’s specialist arm The Mortgage Works announced on 29 April its rental cover rate would rise from 125 per cent to 145 per cent for all buy-to-let 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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Mark Harris, chief executive of broker SPF Private Clients, said: “Similar to interest-only lending in the years after the crunch, it is likely other buy-to-let lenders will follow suit in a domino effect.”

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 buy-to-let lending was another likely cause behind TMW’s decision.

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

“Advisers will have an important role in helping educate clients and encouraging them to run the rule over the numbers. Keeping the mortgage under close review will be even more important.”

The PRA consultation could also see the regulator lean on mainstream lenders to improve their standards, said Bob Young, chief executive of buy-to-let specialist Fleet Mortgages.

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

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

Many landlords – even those with large amounts of equity in their properties – would be unable to afford the loans they need, or unable to switch lender, he said. “With 125 per cent coverage having been pretty standard across the industry for the last 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 last two years, it will have little affect on the market other than prime high value properties.

“I haven’t really had any issues with the higher rents needed on normal buy to lets, it’s the one bed central London flats which will have be knock on.”