Tighter affordability rules limit buy-to-let borrowers’ hopes
Amateur landlords will find it harder to take out a buy-to-let mortgage after one of the UK’s biggest lenders raised a key threshold of affordability in response to new constraints on the sector.
The Mortgage Works said on Friday it would require borrowers to show that their monthly rental income from a property would cover 145 per cent of their mortgage payments — up from its former threshold of 125 per cent, the industry standard.
TMW, a buy-to-let subsidiary of Nationwide, blamed Treasury moves to limit mortgage interest tax relief, due to start taking effect from April 2017. It was making the changes, it said, “in order to help landlords safeguard positive cash flow, as future tax relief changes begin to phase in from next year”.
George Osborne, the chancellor, has moved to damp rapid growth in buy-to-let with extra taxes and curbs on reliefs, to reduce what he said was the “huge advantage” enjoyed by landlord investors when competing with owner-occupiers. As well as limits to mortgage interest tax relief, buy-to-let now incurs a 3 percentage point stamp duty surcharge and faces reduced allowances for wear and tear.
TMW is also reducing the maximum ratio of loan-to-property value from 80 per cent to 75 per cent, it said, in changes that would come in from May 11.
Andrew Montlake, director at mortgage broker Coreco, said the announcement underlined lenders’ fears that recent tax changes would hit landlords’ income. “I suspect they will not be the last [lender] to change their rental calculations with this in mind,” he said.
The moves would cause buyers of rental homes to revisit their calculations and potentially the location of their purchase, said Richard Donnell, research director at Hometrack. “Moving the rental coverage ratio to 145 per cent forces investors either to put in more deposit or go into lower-value markets, where the impact is less marked.”
TMW is not the only lender to tighten affordability requirements. Nottingham Building Society this week raised the notional interest rate it used to calculate the rental coverage ratio by half a percentage point to 5.5 per cent.
The National Landlords Association has complained of a government “assault” on buy-to-let, warning that some of the costs will inevitably be passed on to tenants. Mr Montlake of Coreco agreed. “The worry is that this will hit not just landlords but tenants, too, in the form of higher rental payments at a time when many are already stretched.”
The tighter loan conditions are likely to spur more investors to buy through limited companies rather than as individuals, since corporate vehicles are not subject to the new limits on tax relief. TMW lends only to individuals, not corporate-owned buy-to-let.
David Whittaker, managing director of buy-to-let broker Mortgages for Business, said: “It will be the lenders with products in this category who will be the likely winners out of this in the long term.”
Unfortunate development which will cause repossession and consequent tenant eviction flowing from the repossions.
In a situation where current payments are being met by Landlords and tenants but don't meet new criteria it will ensure refinancing is less possible and return the properties t the private for sale sector following the lenders right to evict.
This is a European directive which will cause the problem it seeks to prevent unless it is only applied to new properties in the buy to let sector and not to refinance of existing properties. If this applies as currently proposed the letting stock will be reduced and return to being sold by the banks and unless done after tenant eviction at 30% of open market vacant possession value.
Academic theory is set to remove badly needed housing stock from the rental market ,cause insolvency,bankruptcy,homelessness and a banking crises flowing from changing rules which are broadly working. The silence from the public sector who will be put into a letting stock crisis as a consequence is surprising as is the silence of the treasury who will be forced to borrow to finance new public sector homes they can't afford.
It's a quadruple whammy , for small Landlords not able to refinance despite meeting all their payments. For the tenant who has also met all current payments who faces eviction by the lender not his làndlord,by the banks who will have to evict manage and sell at a loss ,and by the government who will have to bed and breakfast the homeless.
This can all be stopped by allowing refinance for say existing small Landlords currently meeting the existing criteria on similar terms to current criteria at renewal for say five years to alloy orderly reorganisation of their tenants and assets.