Now buy-to-let borrowing will get a grilling, too: Banks extend tough tests to would-be landlords
08-09-2015
- Move comes as fears grow investors to blame for property prices rocketing
- Budget last month also announced crackdown on tax breaks for landlords
- With interest rates to rise buy-to-let borrowers may be priced out of market
By Victoria Bischoff for the Daily Mail
Banks are cutting the amount landlords can borrow and demanding they pass stiff tests in a crackdown on the buy-to-let boom.
High Street lenders are introducing the tough checks as fears grow that thousands of investors are cashing in on cheap mortgages.
The new rules will reduce the amount landlords can borrow by thousands of pounds, forcing many to put up much bigger deposits.
Frenzy: Buy-to-let has been blamed for high house prices but now lenders are introducing tough checks as fears grow that thousands of investors are cashing in on cheap mortgages
In addition, those applying for a buy-to-let mortgage will face the same kind of strict interviews and financial checks as those buying a home to live in. As buy-to-let loans are not regulated by the City watchdog, landlords previously did not have to pass these tests.
Landlords already face a squeeze on their borrowing thanks to a tax raid in the Budget last month.
And with an increase in interest rates predicted next year, many potential buy-to-let investors could soon be priced out of the market.
Andrew Montlake, director of mortgage broker Coreco, said: ‘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 two million landlords in the UK, of whom 1.6million have a mortgage. Buy-to-let mortgages make up one in five of all new home loans. Last year 100,000 landlords borrowing £27.4billion bought buy-to-let properties – a 21 per cent increase on 2013. The boom is thought to have been driven by older savers who have suffered paltry returns since the Bank of England base rate fell to a record low of 0.5 per cent.
With an increase in interest rates predicted next year, many potential buy-to-let investors could soon be priced out of the market
Landlords enjoy generous tax breaks which allow them to write off the interest on their mortgages against their profits. This means wealthier investors can claim up to 45 per cent tax relief on their buy-to-let loans.
However, the Bank of England has warned that buy-to-let investors are most vulnerable to the rate rise expected next year.
Last month the Chancellor announced that from next April, landlords’ tax relief will be limited to 20 per cent. The surge in landlord loans has been blamed for property prices rocketing, leaving many potential first-time buyers unable to get on the housing ladder.
There have been calls for buy-to-let mortgage regulation, but banks already seem to be taking matters in to their own hands. NatWest and Accord, part of Yorkshire Building Society, have increased the interest rates they expect landlords to be able to meet from their rental income.
Investors now face a reduction in the amount they can borrow or must find a bigger deposit.
For example, the interest rate Accord uses is rising from 5 to 5.24 per cent, meaning a landlord receiving £750 a month in rent can now only borrow a maximum of £137,400 – £6,600 less than before. NatWest has increased its rate from 5.25 to 5.5 per cent.
Barclays, meanwhile, has introduced a new affordability check that requires landlords to answer questions before they can get a loan, such as how much they spend on household bills and childcare.
This is the same kind of test that ordinary homeowners have been made to pass since tough new lending rules were introduced last year.
Barclays will now refuse to lend to landlords if they think they are reliant on rental income to cover their living expenses.
Other banks and building societies are expected to follow suit. Many already carry out similar checks behind the scenes, but could bring in formal rules.
Currently, most banks also demand landlords have a minimum income of £25,000, which experts predict could rise.
David Hollingworth, of broker London & Country, said: ‘Buy-to-let rates are astonishingly low. So part of the reason banks and building societies are toughening up their lending criteria may just be because they are getting in so much business.’