Buy-to-let borrowers are to face yet more hurdles as the Bank of England (BoE) introduces new “affordability checks” and mortgage repayment “stress tests”.
From January, the BoE’s Prudential Regulation Authority will ask banks and specialist buy-to-let lenders to verify that landlords can at least afford the mortgage in a scenario where they are paying interest of 5.5 per cent.
It will also suggest that the interest coverage ratio – the ratio of rental income to mortgage payments – be increased to a minimum 125 per cent.
The BoE say these adjustments would further “professionalise” the market and sizeably reduce the number of landlords with only a small number of buy-to-let properties.
To add to borrowers’ difficulties, the percentage of Income Tax relief landlords can get on residential property finance costs will be restricted to the basic rate of tax from April 2017. This means that landlords currently claiming back 40 or 45 per cent in tax relief will see a significant drop in their monthly income.
Lenders will look to counteract this move by further increasing their interest coverage ratio for buyers. The Mortgage Works and TSB have already moved to 145 per cent, meaning borrowers will be offered smaller mortgages against property values.
Steve Olejnik, of Mortgages for Business, said it was “the end of 125 per cent” for individual borrowers.
“The Bank of England is assuming that every borrower is a higher rate taxpayer. If you feed that into your affordability model, then 125 per cent does not work.”
However, the 125 per cent rate would still apply for landlord businesses held as limited companies.
Mr Olejnik said: “For many switching borrowing to corporate vehicles will be the solution and we are now seeing [corporate] buy-to-let purchases account for 63 per cent of all buy-to-let applications. This is a sea change from this time last year when it was only 30 per cent.
“Despite the costs involved many landlords are also “selling” personally owned property into limited companies because, in the long run, it is more tax efficient. We expect this trend to continue.”