Fear that rents could rise as another lender makes buy-to-let mortgage changes

Posted 18 November 2016

New rules from a lender to buy-to-let customers seem set to have an adverse effect on borrowers who pay more than the standard rate of income tax...

Britain's biggest buy-to-let mortgage lender has announced changes to its buy-to-let mortgage rules which many experts believe could push up the cost of renting.

Birmingham Midshires Building Society is set to change its rules on buy-to-let lending by introducing different criteria depending on how much money an applicant earns.

Lender set to tailor buy-to-let mortgage criteria to individual borrowers

The UK's leading buy-to-let mortgage provider is set to apply different rules to borrowers based on their own income.

Currently, Birmingham Midshires, a subsidiary of Lloyds Banking Group, requires borrowers to charge monthly rents that cover at least 125% of their mortgage repayments.

The changes mean that borrowers who pay higher or additional rate income tax will be subject to tougher requirements. The society becomes the first lender to introduce specific rules for landlords based on their income.

The changes to their criteria follows the recent call from the Bank of England that lenders should take a landlord's wider costs into account when granting a mortgage. This includes not just their income but also their tax liabilities.

The new requirements foreshadow changes to tax rules which start to come into effect in April. From spring 2017, landlords will see the amount of mortgage tax relief they can claim gradually reduced to 20% between 2017 and 2020.

The change will mean landlords who pay higher or additional rate income tax will be affected more significantly by the change than basic-rate taxpayers.

Birmingham Midshires is concerned about the impact of an increased tax bill on landlords' income and their ability to repay their mortgages. The lender says that higher and additional rate taxpayers will be offered a rental cover ratio that reflects their individual circumstances.

The Birmingham Midshires approach differs from many other lenders who have simply increased their rental income requirement for all clients, irrespective of income.

For example, Nationwide has simply increased the amount of rental cover required on mortgage repayments from 125% to 145% for all buy-to-let borrowers regardless of tax status.

Experts believe the cost of renting will rise

As lenders increase the amount of rental income a borrower needs to obtain a buy-to-let mortgage, many experts believe that landlords will have no choice but to put up the cost of renting.

Rents are already at record highs with the average in England and Wales sitting at £887 and in London it is even higher at £1,391, according to Your Move’s Buy-to-Let Index.

Rents have already been rising rapidly in 2016 as landlords prepare for next year’s tax change to stop it eating into their returns. BT.com says that “the changes to lending criteria from buy-to-let lenders could result in rents rocketing even further skyward.”

 

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