Landlords looking for a buy-to-let mortgage could soon be required to stump up deposits of up to 60 per cent.
A perfect storm of tax changes, risk-averse lenders and strict stress tests may result in some areas that are all but off limits for investors.
Stress testing and rental cover requirement
In a knock-on effect from Chancellor George Osborne’s tax changes for landlords, the Bank of England has instructed banks to stress test would-be borrowers at a higher threshold.
The changes, set to come into force next year, mean that lenders will be looking to test buy-to-let investors to ensure they can afford a 5.5 per cent rate, whilst 145 per cent is covered by their rental income.
This means that after looking at the average rental yield in some areas, some landlords could be forced into extortionately high buy-to-let mortgages.
Property crowdfunding website Property Partner revealed that some landlords could need a 60 per cent deposit to meet the recommended criteria.
Where to avoid buy-to-let
And worryingly for borrowers, three banks have already introduced the 145 per cent rental cover requirement.
With Barclays,TSB and Nationwide’s The Mortgage Works already making the change as standard, it leaves certain areas of the country - including Worcester, Cambridge, Bedford and Chichester - extremely difficult to invest in.
Worcester currently offers yields of less than four per cent, particularly poor when you compare this to buy-to-let in Leeds which offers gross yields of up to 8.5 per cent, and the other best buy to let areas in the UK.
The average house price in Worcester is £188,694 with an average rent of £492. This would mean that lenders may only offer a 39 per cent mortgage.
Best buy-to-let mortgage rates on the market
However, it’s not all doom and gloom. Experts have predicted that the new measures could lead to tailored products for landlords with very big deposits.
Currently, borrowers able to stump up a 60 per cent deposit would receive a similar deal to those able to provide a 40 per cent deposit.
And despite the doom and gloom of an increased rental cover requirement, buy-to-let mortgage rates are being cut. In fact, some buy-to-let mortgage rates have been cut by up to 0.75 per cent by lenders.
Have you come across the 145 per cent rental cover requirement? Let us know below.