Following months of uncertainty, landlords now know that it will soon become harder to obtain a buy-to-let mortgage.
For some, it may mean that they won’t be able to get a mortgage - or even remortgage - at all.
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Tighter lending controls announced
It follows the regulator’s announcement to introduce tighter lending controls on landlords from the beginning of next year.
The regulator has finally confirmed the new rules, which may mean investors need to find larger deposits or increase the rents that they charge their tenants before they can take out a loan.
David Hollingworth, of mortgage brokers London & Country, explained that the rules could prove a challenge for landlords hoping to invest in the buy-to-let sector.
He said: “Many are not going to be able to find the extra money they need for a deposit or increase rents by enough to cover the shortfall.”
Safeguarding against higher interest rates
The regulator - the Prudential Regulation Authority - is hoping that the new rules will ensure that landlords can afford their loans if interest rates rise.
Previously, landlords only needed to prove that their tenants were paying enough rent to cover their monthly mortgage payments. Most lenders required that the rent was at least 125 per cent of the monthly payments.
But in anticipation of the rules, some lenders began increasing this percentage to 145 per cent.
Stress tests come into play
They have also been amending their lending criteria to include ‘stress tests’ to check that landlords can still afford their loans if interest rates rise from typically 3.5 per cent today to more than 5 per cent.
The new lending rules for landlords mean that from the beginning of next year, the regulator will make the stress tests more difficult, increasing the level to 5.5 per cent.
Ray Boulger, of mortgage brokers John Charcol, said: “All buy-to-let lenders will have to use this minimum rate of 5.5 per cent from 1 January 2017 except for mortgages with a fixed rate for at least five years.”
However, he added there was a small glimmer of hope for landlords, saying: “The PRA has left the minimum acceptable rental cover percentage at 125 per cent.”
“Therefore, although lenders will have to use a minimum interest rate in the rental cover calculation, they still have flexibility on whether to continue using 125 per cent, as many do, or some percentage above that.
“A lender whose preference would be to go to 145 per cent cover, as some already have, to reflect the income tax charges, but keep the interest rate used at five per cent could achieve the same result by calculating the rental cover at 132 per cent based on a rate of 5.5 per cent.”
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