Following a record year of buy-to-let (BTL) lending, on criteria which has been more relaxed than that for homeowner borrowers, lenders are to introduce tough new checks before they will approve a BTL mortgage.
The move comes amid fears that the boom in buy-to-let is fuelling rocketing property prices in the UK, due in part to competition between lenders and the availability of cheap mortgages.
The Treasury and the Bank of England fear that as interest rates start to rise, expected early in 2016, many BTL borrowers will struggle with mortgage payments, prompting a mass sell-off with the potential to de-stabilise the banks.
Now, before lenders will give their approval for a new mortgage, buy-to-let borrowing are likely to get a severe grilling as the banks introduce the tough new tests for landlords.
Coming on top of last month’s crackdown on tax breaks for landlords the Chancellor has clearly instigated a strategy to cool the BTL market, while insisting that the government supports and wants to encourage a viable private rented sector (PRS).
In addition to these financial measures, the government has also announced this week the start of a campaign to crack done on rogue landlords, and in particular those that are housing illegal immigrants in unsafe and overcrowded conditions.
The new lender rules are set to reduce the amount landlords can borrow by thousands of pounds, forcing many to put up much bigger deposits if they wish to secure a loan. Those applying for a buy-to-let mortgage will now face the same kind of strict interviews and financial checks as those seeking a homebuyer loan.
Andrew Montlake, director of mortgage broker Coreco, told The Daily Mail newspaper:
“Banks are all too aware that the powers that be are watching the buy-to-let industry extremely carefully. Landlords should brace themselves for banks becoming far stricter in the coming months.
“Banks and building societies will likely put in place extra checks to make sure they are only handing out loans to investors who understand what they are doing.”
There are estimated to be more than two million landlords in the UK, and of those around 75% have some sort of mortgage on their BTL property. Around 20% of mortgage lending is now for BTL totalling over £200bn, with 100,000 landlords borrowing more than £27bn last year alone.
More and more people have considered the BTL option for their savings, including those releasing money from their pensions after the “pension freedom” provisions brought in this April, because of the paltry returns available elsewhere.
Lenders will in future be looking beyond a borrower’s self-funding” ability but will be interested in other commitments. Lenders get nervous if they feel the applicant is over-stretched and doe not have enough spare income to cover potential void periods or should they get a bad tenant.
Rent calculations are tightening, for example, the requirement for 125 per cent of 5 per cent will move to 125 per cent of 5.24 per cent.
This means an investment will not be viable without the landlord charging more rent. With a 75% LTV loan on a £250,000 property, the landlord would have to charge £976 rent to meet the old criteria, whereas they will need to charge £1,023 under the new.
Following record year of BTL lending, lenders are to introduce tough new checks before they will approve a mortgage – http://t.co/HFze2krPLi
— LandlordZONE® (@LandlordZONE) August 10, 2015