The bolts are set to be tightened for landlords that are looking for a buy to let mortgage with a small deposit, as mortgage deposit requirements could rise to 60% in some areas, as we approach 2017.
This deposit rise has been provoked by a perfect storm of tax changes, risk-averse lenders, and strict stress tests, that may push some areas to off limits and out of budget, for potential investors.
Stress testing and rental cover requirement
After Chancellor George Osborne announced tax changes for landlords, the Bank of England has instructed banks to stress test potential borrowers at a higher threshold, thus resulting in much tighter regulation.
The changes have already begun for some lenders, which will create a ‘test’ method carried out by lenders, to ensure that buy-to-let investors can afford a 5.5% rate. Lenders are also looking to ensure that gross rental income will be at least 145% of the mortgage payments.
From April 2017 some landlords will no longer be able to offset all of their mortgage interest costs against their rental income, putting many under increased financial strain. This was after the Chancellor unveiled a tax change in 2015, which basically restricts landlords’ ability to deduct the full cost of their mortgage interest. The tax relief available to landlords on their mortgage interest is the basic rate.
The change will affect landlords whose income means that they will be liable to pay higher rates of income tax on their rental income, and in working out whether there is any higher rate tax payable, remember that the income has to be calculated before deducting the amount of any interest payments being made.
Where to avoid buy-to-let
For buyers that are already worried, the 145% rental cover requirement has already been introduced by the following banks so far:
- Nationwide’s ‘The Mortgage Works’
- Barclays
- TSB
leaving the following areas in particular, becoming more difficult to invest in: Worcester, Bedford, Cambridge and Chichester.
The worst affected area is Worcester, with average house prices £188,694 and average rent at £492. Landlords would need an enormous deposit of 61% just to qualify. This means that lenders may only offer a 39% mortgage.
Best buy-to-let mortgage rates on the market?
For landlords able to afford and meet the stress-testing measures, their may be a rise in tailored products to benefit them. This will mean that in some cases borrowers that will only be able to qualify for a 40% deposit, will receive a similar deal to those able to provide a 60% deposit.
To conclude, it isn’t all doom and gloom. As we begin to head into the closing months of 2016 buy-to-let mortgage rates are being cut by some lenders. They now offer two year fixed rate deals, for those with a 25% deposit being cut up to 0.2% and those with a 35% deposit up to 0.7%.