Mortgages  

Buy-to-let set to be choked by new rules

Buy-to-let set to be choked by new rules

Buy-to-let landlords could be forced to stump up more than 60 per cent deposits in some locations, if all lenders introduce stricter borrowing requirements, according to research by Property Partner.

At the end of June, the Bank of England completed a consultation on new affordability checks for buy-to-let mortgages.

These stress tests include an assumption that rates reach 5.5 per cent, as opposed to the current historic lows.

When calculating how much to lend, banks will also need to factor in the landlord’s costs of letting the property, along with any tax liability.

Most lenders currently stress-test mortgages so that rental income covers 125 per cent of mortgages payments, known as the interest coverage ratio.

But ahead of the Bank of England’s Financial Stability Report today (5 July), some providers are already tightening their rules, including Barclays and Nationwide, resetting their interest coverage ratio to 145 per cent.

If all other lenders follow suit, purchasing a buy-to-let property with a mortgage will be impossible in more than two-thirds (59 out of 85) of major towns and cities in the UK, without a 40 per cent deposit, according to Property Partner analysis.

The property crowdfunding platform looked at mortgage affordability across 85 towns and cities, setting the interest coverage ratio at 145 per cent.

Worcester in the West Midlands came top of list with the highest financial barriers to entry.

The increased interest coverage ratio would require a landlord buying an average-priced property there to put down at least a 61 per cent deposit - or £115,000 in cash terms - as a minimum.

Potential buy-to-let landlords in the commuter belt, including Chichester, Chelmsford, Bedford and Reading, also face tough lending restrictions.

Property Partner chief executive Dan Gandesha said traditional buy-to-let landlords have had it tough of late with successive assaults on their potential income.

“The stricter lending rules expected to be introduced by the Bank of England follow April’s stamp duty surcharge of 3 per cent for buyers of second homes and buy-to-lets.

“And from April 2017, the gradual withdrawal of mortgage interest tax relief will put further restraints on landlords’ profits.

“This lending squeeze will only increase the financial barriers to entry to the market, restricting access to only cash buyers or those with hefty deposits, and potentially forcing some existing landlords to sell up,” he argued.

“Highly-leveraged landlords seeking to remortgage could face a nasty shock, if their bank tells them they no longer qualify for the same loan-to-value mortgage.”

Last week, the Council of Mortgage Lenders urged the PRA to take into account the wide range of regulatory and fiscal changes already affecting the buy-to-let sector when rule changes to considering underwriting standards.

Ray Boulger, senior technical manager at John Charcol, told FTAdviser the rental cover rise has been in part down to the proposed PRA changes, but lenders were already reacting to last year’s income tax changes and tightening up before the consultation was announced.