Their research shows that buy-to-let landlords could be forced to stump up more than 60% deposits in some locations, if all lenders introduce stricter borrowing requirements.
At the end of June, the Bank of England completed a consultation on new affordability checks for buy-to-let mortgages. These ‘stress tests’ include an assumption that rates reach 5.5%, as opposed to the current historic lows. And when calculating how much to lend, banks will also need to factor in the landlord’s costs of letting the property, and any tax liability.
Today most lenders stress-test their mortgages so that rental income covers 125% of mortgages payments - this is known as the Interest Coverage Ratio (ICR). But ahead of the Bank of England’s Financial Stability Report on Tuesday (July 5), some providers are already tightening their rules, including Barclays and the Nationwide, who have reset their ICRs at 145%.
If, on guidance from the Bank of England, all other lenders follow suit, purchasing a buy-to-let property with a mortgage will be impossible in more than two-thirds (59 out of 85) of major towns and cities in the UK, without a massive 40% deposit.
Property Partner analysed mortgage affordability across 85 towns and cities, setting the Interest Coverage Ratio at 145%. Worcester in the West Midlands came top of list with the highest financial barriers to entry. The increased ICR would require a landlord buying an average-priced property there to put down at least a 61 per cent deposit, or £115,000 in cash terms - minimum.
Dan Gandesha, CEO of property crowdfunding platform Property Partner, comments:
“Traditional buy-to-let landlords have had it tough of late with successive assaults on their potential income. The stricter lending rules expected to be introduced by the Bank of England follow April’s stamp duty surcharge of 3% for buyers of second homes and buy-to-lets.
“And from April 2017, the gradual withdrawal of mortgage interest tax relief will put further restraints on landlords’ profits
“This lending squeeze will only increase the financial barriers to entry to the market, restricting access to only cash buyers or those with hefty deposits, and potentially forcing some existing landlords to sell up.
“Highly-leveraged landlords seeking to remortgage could face a nasty shock, if their bank tells them they no longer qualify for the same loan to value mortgage.
“But these days there are simpler and much more accessible ways to invest in bricks and mortar, without the hassle and risk of buying individual properties on your own. Similar to cash buyers, investments through Property Partner will be unaffected by the stricter criteria.”
