Changes to lending criteria for buy-to-let landlords – iConn Property Management, Canterbury
Many mortgage lenders are now tightening their lending criteria following changes to legislation on tax relief for landlords. The Guardian reports Nationwide’s response to this:
Nationwide building society is tightening up its criteria for lending to buy-to-let landlords ahead of changes to how much tax relief they will be allowed to claim against their repayments.
Landlords who take new loans from the society’s specialist arm The Mortgage Works (TMW) will only be able to borrow up to 75% of a property’s value, instead of the current 80%, and will have to prove that their rental income is at least 145% of their monthly mortgage payments. Currently the figure is 125%, in line with most other lenders.
The changes come ahead of new rules on mortgage interest relief for landlords, which will begin to take effect in April 2017, and as the Bank of England attempts to rein in buy-to-let lending.
Under the tax changes, landlords who can currently get tax relief of 40% on their interest payments will see the amount reduced over five years to 20%. Lenders have also been told to consider the borrower’s costs associated with letting the property, including tax costs, when they assess affordability for loans.
Nationwide’s changes to the rules on rental income, which come into effect on 11 May, will mean that a landlord who takes £10,000 a year in rent will see the maximum loan they can have reduced from around £160,0000 to £138,000.
Alternatively, if they want to borrow up £160,000 at 65% loan to value “they will have to source a property that will yield an extra circa £130 in rent per month”, the lender said.
Paul Wootton, the managing director of TMW, said the move was designed to help landlords strengthen their cashflow position “and help them withstand the impact of increased costs from the new tax regime”.
He said: “As a responsible lender, this change is a pro-active move that recognises the need to help safeguard rental cover for landlords over the coming years, and in advance of the forthcoming changes to mortgage interest tax relief.”
Andrew Montlake, the director at Coreco Mortgage Brokers, said the change showed that lenders were starting to worry about how recent tax changes would effect landlords’ income in the future.
“I suspect they will not be the last to change their rental calculations with this in mind and landlords should review their portfolio and financing requirements sooner rather than later, as well as making sure they are aware of the very real effects these tax changes will have on their future income,” he said.
“The worry is that this will hit not just landlords, but tenants too in the form of higher rental payments at a time when many are already stretched”.
Other lenders have been making changes to criteria, with Barclays increasing the rent needed to cover repayments to 135% in December. Borrowers who do qualify for loans, however, are being offered record low rates.