Another Hurdle Introduced for Landlords
In the last two years, landlords have been hit with higher stamp duty on purchases of new property and by the impending withdrawal of higher rate tax relief on their mortgage payments.
As if that wasn’t enough, the new BTL mortgage rules came into force on 1 January add further insult to injury.
With effect from 1 January 2017, it has now become harder to obtain sufficient mortgage funding if you wish to purchase a new BTL property or raise additional funds secured against one of your existing properties.
Lenders now have to apply more stringent affordability tests which take into account potential future interest rate increases.
The important acronym here is ICR or Interest Cover Ratio, which determines how much a lender will lend against a property. Projected rental value (generally set by a local surveyor)must be at least equal to your interest payments multiplied by this percentage.
Before 1 January most lenders would use a fairly standard 125% and do the calculation based upon today’s interest rate.
So if your rents were say £1000 a month, your mortgage payments could not exceed £800 a month or £9600 per annum. If the interest rate being offered on the loan was say 3.5% and the borrowing did not exceed 75/80% of the property value, you would potentially be able to obtain a substantial mortgage loan of almost £275,000.
Now, many lenders are upping the rate to at least 145% and will have to work on a much higher, notional interest rate of 5.5%. The maximum mortgage on offerin the example above now falls by 45% to approximately £150000.
Under the new stress test lenders will have to assume the higher of a 2% increase in mortgage rates or 5.5% in the first five years of the mortgage.
In addition, where personal income is being used to gain mortgage funding,then in the same way as now applies to residential mortgages, the borrower’s monthly expenditure will also be examined to determine perceived affordability.
Full details can be found here:
Things get even worse in September, as if you have four or more Buy to Lets you will be classed as a higher risk “Portfolio Landlord” and face even more stringent criteria!
So it rather seems that the halcyon days of many landlords having easy access to large loan-to-value mortgages may be coming to an end.
If you are a landlord and require help or advice on all things financial please don’t hesitate to get in touch with one of our property specialists.