There are changes afoot in the buy-to-let mortgage market.
The good news: buy-to-Let mortgage deals get more competitive
Competition between mortgage providers continues to hot up, with landlords now having access to some of the cheapest ever buy-to-let mortgage deals.
There has been a sharp rise in the volume of buy-to-let mortgage products available, with recent research by Mortgage Brain revealing that there are close to 1,900 mortgage deals on the market.
With a current rate of 1.89% (as of 1st October 2016), the cost of a three year Fixed mortgage with a 60% LTV is now 5% cheaper than it was at the start of July. The same product with a 90% LTV (at 2.94% over three years) has seen a similar reduction in cost and is now 4% lower than it was three months ago.
The bad news: new tougher requirements for buy-to-let mortgages from January 2017 ahead of April tax changes
Lenders will have until 1 January to introduce new tougher requirements for buy-to-let borrowers, according to a deadline set by the Bank of England. The Prudential Regulation Authority has set out a timetable for lenders to tighten up criteria for buy-to-let borrowing following a consultation which started in March.
- Lenders will have to require landlords to have higher levels of rent relative to their mortgage costs, as well as stress-testing all new mortgages at a rate of 5.5%, by 1 January 2017. However, lenders will be able to factor in rent rises of up to 2% a year when deciding whether a landlord will be able to afford a property, a factor which they were not allowed to take into account before.
- The PRA will also require landlords with four or more properties to give out more information about their income and debts.
- The Bank said that lenders must require borrowers to receive a minimum of 125% of their mortgage costs in rental income - a standard that almost all of them already follow. However, it also said that lenders must take into account a borrower's future tax liabilities, including the changes to mortgage interest relief.
Since the start of this year many banks have been increasing the required rental income because of concerns over borrowers' ability to afford loans as the new taxes start to apply. Some, such as Nationwide, have moved to require income of 145pc of the landlord's mortgage costs.
In the last week, Britain’s largest buy-to-let lender, Birmingham Midshires, a division of Lloyds, was the first to restrict landlords' loans based on their likely tax bills - meaning higher-earning buy-to-let investors will come under pressure to raise rents.
Birmingham Midshires currently requires all borrowers to charge rents equal to at least 125pc of their monthly mortgage costs but it has said that higher-earning borrowers, who pay tax at the 40pc and 45pc levels, will be subject to tougher requirements and the changes would be introduced by the end of the year.They have developed a rental income calculator showing the position for an individual borrower's circumstances.
There is already widespread evidence that rents are being increased ahead of the tax changes, and brokers warned that lending requirements, such as those being introduced by Birmingham Midshires, were likely to accelerate the trend.
Portfolio assessment - mortgages for landlords with four or more properties after September 2017
Property market experts are also suggesting that landlords with four or more buy-to-let properties will see their borrowing costs climb next year when the new affordability tests come into force. Under regulations from the Bank of England which will come into effect in September 2017, lenders offering a home loan on a new buy-to-let property to anyone who already has four or more will be obliged to check the viability of other loans in their portfolio, bringing extra costs and risks to the mortgage process.
*This article is not legal advice and is not intended to be relied on as such. You should always seek professional advice.
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