For anyone who has tried remortgaging their residential home in recent months, they’ll know that a whole host of tighter regulations have been introduced.
These moves are aimed at ensuring borrowers do not overstretch themselves and can afford to repay the home loans they have signed up to, particular if interest rates should rise.
It has made the process of remortgaging your home much more difficult - and it is an approach that is now being adopted in the buy-to-let arena.
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Buy-to-let rental cover increases
Investors have always had to prove to lenders that they earn a sufficient amount from their rents to cover the repayments on their buy-to-let mortgages. But now they are now being asked to prove that the rents will still be covered if interest rates increase by as much as 5 per cent. This is known in the industry as ‘stress testing’.
It may mean that thousands of borrowers will be unable to meet the new lending criteria on buy-to-let loans. To meet the new rules, borrowers will either need to raise rents to show that their mortgage payments would be met in a higher interest rate environment or borrow less. If they fail to do this, they could end up being refused the mortgage.
Buy-to-let mortgage affordability gets challenging
Nationwide’s buy-to-let arm, The Mortgage Works, is increasing its rental cover requirements from 125 per cent to 145 per cent.
The building society describes the increase as a ‘pro-active move’, saying it is a responsible lender that wants to help safeguard rental cover for landlords for years to come.
It said: “TMW, as part of Nationwide, already robustly assesses the affordability of its buy-to-let mortgages against stress rates that are considerably higher than the borrower’s existing rate.
Follow the leader
“The increase in the rental cover requirement is designed to strengthen this cash flow position even further.” Other lenders are expected to follow suit, with the largest players in the sector including Lloyds Bank through Birmingham Midshires, Santander, HSBC, Bank of Scotland and Virgin Money.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Some lenders have already increased rental stress rates but not to this extent.”