With the latest changes in Stamp Duty coming into effect last month, landlords will feel hard done to with the news that many lenders are beginning to restrict their lending criteria for buy-to-let mortgages. Many lenders are now setting the precedent that landlords will need to receive a larger rental income compared to the cost of their mortgage than they currently do, and this could push some landlords off the market, affecting those in the lower-yielding areas such as London and the South East.
What are the changes?
The current typical rental cover requirement is 125%, so the landlord’s rental income will need to cover the whole cost of the mortgage with 25% left over. However, the new amendments mean that the typical rental cover requirement could increase from 125% to 145% and will be calculated by using a ‘stress rate’ of 5.49% for mortgages between 65 and 75%, and 4.99% for any below that. *
How will it affect me as a landlord?
Whilst tenants will more than likely see an increase in their rents as a result of the changes, landlords will also feel the cost. For example, before the changes began to come in, a landlord that was bringing in £10k in rent per annum, would have been able to borrow a maximum of approximately £160k. However, under the new requirements, that maximum borrowing will decrease to £138k. To secure the same £160k property under the new criteria at 65% LTV, landlords will have to find a property that would yield an additional £130 per month.
Why are lenders doing this? The changes are a direct consequence of lenders being told by the Bank of England that they will face tougher rules when calculating for buy-to-let mortgages. As a result, economists are now predicting that landlords will need a minimum of 40% for a deposit when purchasing a property.
The change is also a reaction to the upcoming tax changes that are due to come in during April 2017, which will see landlords no longer be able to deduct their mortgage interest before working out their tax.
To discuss the changes in the buy-to-let arena, it is strongly advised that you speak to a professional mortgage adviser.
If you would like to discuss this, or any anything else, contact our advisers today on 01202 937444 or visit our other offices to speak to a mortgage broker in Reading or a mortgage broker in Bournemouth
The Financial Conduct Authority does not regulate tax planning and some forms of Buy to Let mortgages.
* The actual rate will depend on your circumstances, please ask for a personalised illustration.