Landlords looking to increase their buy-to-let portfolios, and new investors, will be faced with the need for higher deposits, more rigorous income checks and higher interest rates on their buy-to-let loans.
Following a period of record take-ups of these loans, high street lenders are introducing stricter criteria than before in a crackdown on the buy-to-let boom, which the government and the Bank of England (BoE) fear is pushing up UK house prices.
Coupled with the cuts to tax relief on mortgage interest and set–up fees announced in the Chancellors post-election Summer Budget, the clamp down is likely to have the desired effect the government are looking for: a cooling down of the overheating buy-to-let market.
The overall amount individual landlords will be allowed to borrow is likely to fall by thousands of pounds after they have faced a tough grilling from lenders.
Borrowers applying for a buy-to-let mortgage can expect that lenders will require a rental income which is cover 125% of the repayments. So, typically, if the mortgage repayment is £750 per month, a landlord will need to show the property can support a rent of at least £938.
In additional, as a safety margin, lenders use a higher rate than the mortgage agreed, a notional hurdle rate which is higher, to try to ensure the landlord can meet the monthly payments even if there is a rate hike, or there are problems such as extended void periods or troublesome tenants.
According to www.thisismoney.co.uk mortgage provider Yorkshire Building Society is increasing its notional interest rate from 5 per cent to 5.24 per cent. As this interest rate rises, the lender will lower the amount that a landlord can borrow.
At the lower rate of 5 per cent and a monthly rental income of £750, a buy-to-let investor could borrow up to £144,000 but with the higher 5.24% the maximum allowed would be £137,400.
NatWest on the other hand has announced that it has increased its rate from 5.25 per cent to 5.5%, limiting their borrowing on a £750 rental income to £130,909.
Other lenders including Virgin Money and Leeds Building Society are even higher on their nominal rates at 5.99 per cent. That cuts the loan limit to £120,200 on this same rental income.
When assessing landlords for loans, lenders will be looking for previous experience with buy-to-let and track records on financial management, how they accumulated their deposits, other forms of supporting income and how they can maintain their financial commitments.
Landlords will need to prove that they are not totally dependent on rental income, that they will be able to cope with void periods, tenant problems and repairs to the property.
Whereas buy-to-let landlords could previously take out a buy-to-let loan, an unregulated sector of the mortgage market, based purely on their total rental income, this will be no longer the case. Lenders will almost certainly refuse loans where the borrower cannot show other forms of income, usually in the form of a secure salary of at least £25,000 per annum.
To-date, buy-to-loans have been incredibly cheap and interest only deals, where only interest is paid without paying off the capital debt, repayments have been reduced even further. This has made buy-to-let increasingly popular, in particular by older cash-rich savers struggling to earn a decent rate of interest in a High Street savings account. With mortgage deals at 3.59% with a 25 per cent deposit and a two-year fixed rate it’s created a bonanza. It can’t last!
Bigger Deposits Needed for Buy-to-Let Loans – http://t.co/cdxuXF6smn
— LandlordZONE® (@LandlordZONE) August 19, 2015