Increasing numbers of landlords are becoming buy-to-let mortgage prisoners as a result of being stuck on uncompetitive mortgage rates due to new regulation.
According to The Mortgage Broker Ltd, landlords may feel imprisoned by the new affordability testing which is being undertaken by lenders.
As a result, some landlords are suffering expensive mortgage rates, which are eating into their profits each month or even forcing them into a loss.
The new lending rules means some lenders will have to take into account a landlord’s other expenses such as their tax status. It will be on this stricter lending that landlords will be assessed to see if they can afford to borrow.
The Bank of England’s Prudential Regulation Authority introduced tougher underwriting standards and affordability assessments on 1 January to make sure borrowers can cover the cost of their mortgage in the event of an interest rate rise.
Lenders are required to set a minimum borrower rate of 5.5% during the first five years of a buy-to-let mortgage contract when assessing affordability.
They will also have to take into account annual rent rises of 2% when assessing whether a landlord can afford a property.
Portfolio landlords with four or more rental properties will be subject to stricter checks on income and debt from September.
In the last year several lenders have increased the rental income a landlord must bring in relative to their mortgage costs.
While the standard interest coverage ratio was 125%, many lenders have now raised this to 135% or 145%, resulting in landlords having to increase rents or reduce their mortgages.
According to Darren Pescod, managing director of The Mortgage Broker, often landlords do not fit the new lending criteria.
“Britain’s two million landlords are facing assaults from both the taxman and the Bank of England. The mortgage restrictions are very bad for landlords and pose a major threat to BTL investments. If landlord mortgages are tougher to secure, buy-to-let landlords could find themselves stuck on expensive rates indefinitely,” he said.
“Thankfully, the Ipswich Building Society has returned to the mortgage market with two new buy–to-let products, specifically aimed at buy-to-let prisoners or ‘misfits’. The good news is that the lender will only assess rental income at 125% of the mortgage pay rate.”
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