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Buy-to-let Watch: TMW is just the first…

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When others follow TMW’s lead on their rental calculations, landlords in lower-yield areas will have much less choice

Another day, another challenge for our sector. In a move that surprised no one but no doubt disappointed many, The Mortgage Works has become the first lender to hike its rental calculation.

The Nationwide-owned firm announced last month it was increasing its rental cover requirement by a massive 20 percentage points to 145 per cent. Citing a need to help landlords safeguard positive cashflow as the reason behind the changes, it also revealed it was reducing its maximum LTV from 80 per cent to 75 per cent.

With changes to landlord tax relief coming into effect next year, lenders were bound to take action. The Chancellor’s message is clear: buy-to-let, rightly or wrongly, must be reined in and that requires a more conservative, controlled approach to lending. TMW is simply doing what every other mainstream lender will have to do.

But this move will play into the hands of specialist lenders, particularly in the limited company space, because interest will still be tax deductible in an SPV structure and therefore the higher rental coverage should not be required. It also begs the question whether other lenders will produce different rental calculations based on different applicants’ earnings, given that the tax relief changes affect only higher earners.

I never talk down the market and I believe it and investors will adapt to this change in time – but there will be unavoidable consequences.

The new rental calculation means investors with smaller deposits will see the maximum loans available to them fall unless they can find a property that attracts a higher rental income. On a property with a rent of £1,000 a month, the amount that can be borrowed based on the new calculation is £150,744 – down from £174,863. Hence in areas with lower yields TMW will probably not be an option for many landlords.

When other lenders address their calculations (as they will), landlords operating in these areas will have much less choice and availability. I am sure more lenders will use earned income/top slicing to top up any shortfall in rental income.

Another inevitable consequence will be rent rises. In London and the South-east, rents will surge as investors battle to meet the new requirements. How ironic that the Government’s strategy for achieving a safer market is resulting in inflated rents and tenant detriment.

We expected all of this from the moment the Chancellor announced his plans last year – but that does not make it any easier to take.

MS-BuytoLet-Designs

Ying Tan is managing director of Buy to Let Club

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  • john 12th May 2016 at 11:20 am

    Like the RTB “landlords” who want to pay for their RTB in cash then remo to raise funds for Buy to Let. These are the sought of people being affected by this and im really very pleased. Abusing the system pure greed and supported by the government (and I use the term loosely) about time the playing field was attempted to be levelled. Pure parasites.

  • Bob Singh 11th May 2016 at 11:13 am

    The 3% stamp duty surcharge is a monumental and disasterous policy which in time will prove to be the undoing on the Tory party. The desired effects to create an orderly market will,in practice,not be achieved.
    Market forces are best left alone.
    The buy to let domain for the smaller investor is dead as bigger deposits will lead to fewer people qualifying for the loans.
    Rents will rise and for basic rate tax payers the Ltd Co route is hardly attractive. If the desired effect was to release more properties to ordinary buyers in particular first time buyers then a ban on new build buy to let’s would have achieved this objective in one swoop and prices would have remained affordable for the first timers
    Instead this unworthy tax grab will manifest itself in a housing downturn and hurt more people than it will benefit.
    Will someone please tell the Torys to reverse this before it’s too late.

  • Ben Gosling 11th May 2016 at 10:55 am

    “On a property with a rent of £1,000 a month, the amount that can be borrowed based on the new calculation is £150,744 – down from £174,863.”

    TMW’s stress rate is decreased to 4.99% for 5- and 10- year fixed rates and/or LTVs of 65% or lower. This permits maximum borrowing of £165,849. Not a huge difference, but it shows that TMW is acknowledging that different clients have different levels of risk.

    This is a pattern we are seeing elsewhere. Other lenders are implementing more favourable rental calculations in some cases – usually where the loan is smaller, at a lower LTV or fixed for a longer period.

    • Anonymous 12th May 2016 at 10:03 am

      “Another inevitable consequence of the rental calculation hike will be rent rises. In London and the South-east, rents will surge as investors battle to meet the new requirements. How ironic that the Government’s strategy for achieving a safer market is resulting in inflated rents and tenant detriment.”
      Erm property rents are determined by the cost of living in a particular area. Its about time these greedy landlords were given a taste of reality and some of these spoilt brats who had gifted properties to let out actually are brought to their knees rather than sh@fting the poor which many of them do. The policy is entirely correct and may just may rebalance the property market slightly in favour of he people who NEED to buy somewhere to live rather than the “entitled” land lord who wants to make a quick buck.