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.
Ying Tan is managing director of Buy to Let Club