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'Buy-to-let investors will need 50pc deposit - or no mortgage'
In future only investors with hefty deposits will qualify for loans, brokers warn, as Barclays cuts buy-to-let lending
Thousands of landlords could struggle to remortgage when their fixed deals come to an end. Photo: Justin Sutcliffe
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By Nicole Blackmore
7:57AM GMT 03 Dec 2015
136 Comments
Lenders are shrinking back from the embattled buy-to-let sector and tightening their criteria for new applicants.
The key ratio - the link between rental income and mothly mortgage cost - is being changed by a number of lenders, with the effect that landlords will either have to ramp up the rents they charge tenants, or borrow less.
Mark Harris, of mortgage broker SPF Private Clients, predicted that "the market is moving towards a situation where only those with a 50pc deposit are likely to qualify for a loan."
Barclays has been among the first lenders to move, dramatically raising the application criteria for new borrowers earlier this week.
Mark Harris
Where previously Barclays required landlords to have a rental income of 125pc of the monthly interest, calculated at a mortgage rate of 5.79pc, it has increased this to 135pc at 5.79pc.
The move by Barclays came just as the Bank of England's Financial Policy Committee (FPC) identified the buy-to-let sector as one of the main risks to financial stability.
While the FPC stopped short of recommending new curbs on lending, it warned it was "prepared to act."
The Treasury is expected to launch a consultation before the end of this year on giving the FPC further powers.
This could include imposing lending caps to reduce the number of mortgages that are advanced, and strict new affordability requirements for borrowers. Lenders are likely to rein in buy-to-let loans of their own accord, commentators predicted, rather than wait for any regulatory crackdown.
Buy-to-let investors are already reeling from two draconian tax changes: the removal of their ability to claim tax relief on interest payments, announced in July, and a hike in stamp duty announced last month and applying from April 1.
The sudden withdrawal of lending from the sector is viewed by many as the "final, killer blow."
• Death of buy-to-let: landlords wake up to Osborne's 150pc tax
• One in three Tory MPs own buy-to-lets: why've they wrecked it for all?
Mr Harris said: “If you are going to invest in property you will need to find a lot more equity. This, combined with increased entry costs from April in the form of higher stamp duty for landlords, will increasingly exclude the small-time investor with a property or two.”
A lending clampdown is also potentially devastating for existing investors.
This is because many landlords will find themselves unable to remortgage when their existing deals come to an end - leaving them locked into high rates, potentially losing money month after month as rents fail to cover mortgage costs.
"These developments are not good news for tenants, as landlords will inevitably push up rents."
Mark Harris
Barclays is not alone in tightening its terms.
The biggest buy-to-let lender, BM Solutions, part of Lloyds Banking Group, has also tightened its criteria for new borrowers who have deposits of less than 35pc.
These investors must now have monthly rental income of 125pc of the mortgage at a rate of 5.49pc, compared to a rate of 4.99pc for borrowers with a larger deposit. The change was implemented last month.
David Whittaker, of Mortgages for Business, a specialist buy-to-let broker, predicted that "more lenders will follow suit and tighten their criteria in the coming weeks".
So what does this mean for existing landlords?
• Tables: Best buy mortgages for remortgaging, buy-to-let
• Calculator: How much can I borrow on a buy-to-let mortgage
In numbers: Rising mortgage costs
Take for example a borrower who secures a two-year interest-only fix today at 2.24pc from BM Solutions. He borrows the maximum £180,000 permitted against his £300,000 property (60pc of the value). His monthly mortgage payment would be £336.
If, when he came to the end of his fixed term, he no longer met the affordability criteria, he could be forced onto BM Solution’s standard variable rate, which is currently 4.84pc. This would more than double his monthly payments to £726.
The landlord’s profits will fall further when new tax rules, which mean investors can no longer deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax, are fully implemented. The change will be phased in between 2017 and 2020.
Using the same example above, the landlord (who is a higher-rate taxpayer) has the minimum level of rental income the bank requires – 125pc of the monthly mortgage interest calculated at 4.99pc – or just under £940 a month.
With his current fixed-rate deal, the tax changes alone will cause his annual net profit after tax to will fall from £362 today to £296 in 2020. If he is forced onto BM Solutions’ standard variable rate, and his rental income remains the same, his profits will be completely wiped out and he will be making a loss of £20 a year, before any property maintenance costs are factored in.
Mark Harris said the changes are bad news for tenants, as landlords will inevitably push up rents to cover their higher costs.
He added that the changes will increasingly exclude the small-time investor with a property or two, in favour of larger investors with "much deeper pockets".
In last week’s Autumn Statement, Chancellor George Osborne announced that anyone who buys additional residential properties, such as second homes or buy-to-let properties, will have to pay an extra 3 percentage points in stamp duty from April 1 next year. The extra charge applies above the current “stamp duty land tax” rates.
In future only investors with hefty deposits will qualify for loans, brokers warn, as Barclays cuts buy-to-let lending
Thousands of landlords could struggle to remortgage when their fixed deals come to an end. Photo: Justin Sutcliffe[/COLOR]
New method to preserve your plants in the winterVideo: horticulturalist Sarah Raven explains the best way to protect your favourite plants during winterSponsored by Churchill
By Nicole Blackmore
7:57AM GMT 03 Dec 2015
136 CommentsLenders are shrinking back from the embattled buy-to-let sector and tightening their criteria for new applicants.
The key ratio - the link between rental income and mothly mortgage cost - is being changed by a number of lenders, with the effect that landlords will either have to ramp up the rents they charge tenants, or borrow less.
Mark Harris, of mortgage broker SPF Private Clients, predicted that "the market is moving towards a situation where only those with a 50pc deposit are likely to qualify for a loan."
Barclays has been among the first lenders to move, dramatically raising the application criteria for new borrowers earlier this week.
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"If you are going to invest in property you will need to find a lot more equity"Mark Harris
Where previously Barclays required landlords to have a rental income of 125pc of the monthly interest, calculated at a mortgage rate of 5.79pc, it has increased this to 135pc at 5.79pc.
The move by Barclays came just as the Bank of England's Financial Policy Committee (FPC) identified the buy-to-let sector as one of the main risks to financial stability.
While the FPC stopped short of recommending new curbs on lending, it warned it was "prepared to act."
The Treasury is expected to launch a consultation before the end of this year on giving the FPC further powers.
This could include imposing lending caps to reduce the number of mortgages that are advanced, and strict new affordability requirements for borrowers. Lenders are likely to rein in buy-to-let loans of their own accord, commentators predicted, rather than wait for any regulatory crackdown.
Buy-to-let investors are already reeling from two draconian tax changes: the removal of their ability to claim tax relief on interest payments, announced in July, and a hike in stamp duty announced last month and applying from April 1.
The sudden withdrawal of lending from the sector is viewed by many as the "final, killer blow."
• Death of buy-to-let: landlords wake up to Osborne's 150pc tax
• One in three Tory MPs own buy-to-lets: why've they wrecked it for all?
Mr Harris said: “If you are going to invest in property you will need to find a lot more equity. This, combined with increased entry costs from April in the form of higher stamp duty for landlords, will increasingly exclude the small-time investor with a property or two.”
A lending clampdown is also potentially devastating for existing investors.
This is because many landlords will find themselves unable to remortgage when their existing deals come to an end - leaving them locked into high rates, potentially losing money month after month as rents fail to cover mortgage costs.
"These developments are not good news for tenants, as landlords will inevitably push up rents."
Mark Harris
Barclays is not alone in tightening its terms.
The biggest buy-to-let lender, BM Solutions, part of Lloyds Banking Group, has also tightened its criteria for new borrowers who have deposits of less than 35pc.
These investors must now have monthly rental income of 125pc of the mortgage at a rate of 5.49pc, compared to a rate of 4.99pc for borrowers with a larger deposit. The change was implemented last month.
David Whittaker, of Mortgages for Business, a specialist buy-to-let broker, predicted that "more lenders will follow suit and tighten their criteria in the coming weeks".
So what does this mean for existing landlords?
• Tables: Best buy mortgages for remortgaging, buy-to-let
• Calculator: How much can I borrow on a buy-to-let mortgage
In numbers: Rising mortgage costs
Take for example a borrower who secures a two-year interest-only fix today at 2.24pc from BM Solutions. He borrows the maximum £180,000 permitted against his £300,000 property (60pc of the value). His monthly mortgage payment would be £336.
If, when he came to the end of his fixed term, he no longer met the affordability criteria, he could be forced onto BM Solution’s standard variable rate, which is currently 4.84pc. This would more than double his monthly payments to £726.
The landlord’s profits will fall further when new tax rules, which mean investors can no longer deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax, are fully implemented. The change will be phased in between 2017 and 2020.
Using the same example above, the landlord (who is a higher-rate taxpayer) has the minimum level of rental income the bank requires – 125pc of the monthly mortgage interest calculated at 4.99pc – or just under £940 a month.
With his current fixed-rate deal, the tax changes alone will cause his annual net profit after tax to will fall from £362 today to £296 in 2020. If he is forced onto BM Solutions’ standard variable rate, and his rental income remains the same, his profits will be completely wiped out and he will be making a loss of £20 a year, before any property maintenance costs are factored in.
Mark Harris said the changes are bad news for tenants, as landlords will inevitably push up rents to cover their higher costs.
He added that the changes will increasingly exclude the small-time investor with a property or two, in favour of larger investors with "much deeper pockets".
In last week’s Autumn Statement, Chancellor George Osborne announced that anyone who buys additional residential properties, such as second homes or buy-to-let properties, will have to pay an extra 3 percentage points in stamp duty from April 1 next year. The extra charge applies above the current “stamp duty land tax” rates.
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