Leading buy-to-let lender toughens rules for new mortgages

Posted 4 May 2016 by Nick Parkhouse

Tightening Bank of England regulations to lenders have started having an effect on the criteria that buy-to-let investors must meet to qualify for a mortgage...

One of the UK's biggest buy-to-let mortgage lenders is set to make it much tougher for landlords to get a new loan, in a move which experts believe will be copied throughout the market.

The Mortgage Works, part of the Nationwide Building Society, has changed its criteria and will now require landlords to receive far more rental income to cover a new mortgage.

UK's second largest buy-to-let lender makes 'brutal' changes to rules

Nationwide is the UK's second largest buy-to-let lender behind the Lloyds Banking Group. From 11 May it will tighten its 'rental cover requirement' - the amount a landlord needs to receive in rent compared to the cost of the mortgage repayments - from 125% to 145%.

The rental cover will be calculated using the 'stress rate', which stands at 5.49% for loans of 65% to 75% loan-to-value or 4.99% for loan amounts below that. Nationwide are also reducing their maximum loan-to-value to 75%, providing the new rental cover criteria are met.

As an example, on a £150,000 buy-to-let loan at 75% loan-to-value, the rent will need to be £995 to cover the loan rather than the £858 that is required now.

The Daily Telegraph reports that the changes are in response to the Bank of England's announcement last month that lenders would face tougher rules when calculating mortgages for buy-to-let landlords. It is also a reaction to new tax rules for buy-to-let landlords which will be phased in from April 2017.

Paul Wootton, managing director of The Mortgage Works, says: “This change is a proactive move that recognises the need to help safeguard rental cover for landlords over the coming years, and in advance of the forthcoming changes to mortgage interest tax relief."

Other lenders set to follow suit in 'domino effect'

Experts believe that other lenders will follow the Nationwide in a 'domino effect' which will make it much harder for landlords to obtain a mortgage.

Mortgage expert Mark Harris says: "Some lenders have already increased rental stress rates in response to tax relief changes but not to this extent. In a similar pattern to interest-only lending in the years after the crunch, it is likely that other buy-to-let lenders will follow suit in a domino effect. It will make it much tougher for landlords to get the numbers to add up, and careful consideration will need to be given before expanding portfolios or indeed investing for the first time."


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