Leading lenders toughen up affordability checks for buy-to-let mortgages

Posted 16 December 2015 by Nick Parkhouse

Ahead of the buy-to-let stamp duty surcharge, due in April 2016, mortgage lending rules are also getting stricter for buy-to-let property investors...

Over the last decade, the total owed on buy-to-let mortgages in the UK has soared from £65bn to £200bn. Now, as the government steps in to try and cool the buy-to-let sector, leading lenders are also tightening their rules for landlords.

Several major banks and building societies are imposing tougher checks on aspiring buy-to-let landlords amid fears that many will struggle to cope when interest rates finally rise.

In recent months, the Bank of England and the government have expressed concern over the booming buy-to-let market in the UK. The Chancellor has already announced that tax breaks on mortgage interest payments will reduce in April 2017 while the Bank is concerned that rising interest rates could leave thousands of landlords unable to meet their mortgage payments.

The Bank of England recently warned that buy-to-let borrowers “may be more vulnerable than owner-occupiers to an unexpected rise in interest rates or a fall in income” particularly as they are subjected to less stringent affordability checks than those taking out standard home loans. The Bank predicted that almost six in ten buy-to-let borrowers would struggle if their mortgage rate rose by three percentage points.

Leading lenders bring in tougher landlord checks

Now, lenders including NatWest, Barclays and the Coventry Building Society are implementing tougher checks for landlords to qualify for a mortgage. Barclays has introduced tougher affordability checks by stipulating that landlords’ rental income has to cover 135% of their mortgage payment – up from the industry standard of 125%.

In a letter to mortgage brokers the bank said it was being a “responsible lender”, ensuring that “our aspiring landlord customers can afford the increase in tax liability once these changes come into force.”

Coventry Building Society has also implemented tougher restrictions. To qualify for a buy-to-let mortgage, landlords must now prove that they will be able to continue to afford the repayments if interest rates rise to 5.5%, rather than 5%. Rental income also has to cover 125% of the mortgage interest repayments.

BM Solutions – the buy-to-let arm of High Street giant Lloyds – has already made similar changes, with the Daily Mail reporting that other lenders are set to follow suit.

Tough checks follow government efforts to cool the buy-to-let market

The tougher checks come as other factors look set to cool the buy-to-let market in the next two years. The government has also announced swingeing cuts on tax relief on mortgage interest payments from April 2017.

Currently all property investors can deduct the full amount of mortgage interest they pay from their rental income and only pay tax on the profit. However, by 2020, 40% and 45% taxpayers will only receive basic rate tax relief of 20% against their entire mortgage interest bill.


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