Buy to Let Landlords may face stricter affordability checks

Buy to Let Landlords may face stricter affordability checks
One of the UK's largest buy-to-let mortgage lenders has raised its affordability threshold for amateur landlords, and the Bank of England is also considering in involving themselves in stricter rules for buy-to-let lending.

The Mortgage Works now requires borrowers to show that their monthly rental income will be 145pc of their mortgage repayments - up from the industry standard 125pc. Barclays has also voluntarily moved up to the 145pc rate.

TMW said the stricter controls are to "help landlords safeguard positive cash flow, as future tax relief changes begin to phase in from [2017]."

TMW also reduced the maximum ratio of loan-to-value from 80pc to 75pc in May. It said the main focus isn't to stop people from being loaned money, but to ensure that their deposit is big enough to reduce mortgage costs.

Furthermore, the Council of Mortgage Lenders says less than a third of private rented properties are financed by a buy-to-let loan, at 31pc, so only a handful of landlords are going to be directly affected by the changes.

Meanwhile, the Bank of England is currently consulting on Interest Coverage Ratio (rental income as a proportion of mortgage repayments) and whether it should enforce its own lending criteria in the coming months. The consultation closes at the end of June and is using a false, 'stress' interest rate (of 5.5pc) as a calculation to test whether a landlord could make their repayments in the event of rates going up.

Landlords who rely on high debt levels could therefore face a stumbling block, but could feasibly expand their portfolio towards the north of England where property is more affordable than in the south.

The Financial Times conducted research to compare buy-to-let opportunities in the north that would appeal to landlords, and it shows that the ICR calculation of 4.5pc interest rates reduced the number of viable buy-to-let options from 320 local authorities to 181, and just 50 with a 5.5pc interest rate. Most of these are in northern England and investors can secure available buy-to-let properties with a 75pc mortgage.

David Hollingworth of mortgage advisor London & Country, said:

"The Bank of England has been keeping a close on eye on the risks that the buy-to-let market could pose and the consultation by the regulator puts a clear focus on ensuring mortgages will be affordable.

"That is already stimulating a response from some lenders who have increased their rental requirements when deciding on how much they can lend.  With changes to tax relief on mortgage interest to come and the stamp duty surcharge already in play, it has become even more important for landlords to keep their mortgage under review.

"Mortgage rates are very competitive at the moment so it makes sense to consider shopping around to see if it's possible to lock into a low rate now."

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