Thousands of landlords will be locked out of the buy-to-let market after the market’s second biggest lender severely tightened its criteria, say experts.
Earlier today Nationwide subsidiary The Mortgage Works announced it was increasing its rental cover requirements from 125 per cent to 145 per cent and cutting its maximum LTV from 80 per cent to 75 per cent from 11 May.
The Mortgage Works said the move pre-empted government tax relief changes being introduced next April.
John Charcol senior technical manager Ray Boulger says the tax relief changes and proposed PRA buy-to-let changes will drive more lenders to follow The Mortgage Works’ example.
Last month the PRA published its CP11-16 consultation paper on underwriting standards and proposed that lenders should assume a minimum borrower interest rate of 5.5 per cent for the first five years of the loan.
Experts say this could see some borrowers forced to save for a bigger deposit, or take out a product longer than five years, as they would fail the new stress test requirement.
Boulger says: “We’ve now got the conflagration of lenders beginning to introduce tougher affordability criteria to reflect incoming tax changes, plus also those who weren’t planning to do that will be forced to do so because of last month’s Bank of England changes.”
He says the changes will leave some landlords unable to borrow.
Boulger says: “Getting a high LTV buy-to-let mortgage will become increasingly difficult in most parts of the country. In London and the South East, where rental yields are low, it’s going to be increasingly difficult to borrow more than 65 per cent.
“In those parts of the country where yields are higher, you’ll still be able to get the higher LTVs, but it means landlords will have to save up for a bigger deposit. In most cases the maximum LTV will be reduced. They’ve also got to find the extra 3 per cent stamp duty, so it must have an impact on the number of properties being bought on a buy-to-let basis.”
Fleet Mortgages chief executive Bob Young says: “The impact is going to be very negative for landlords and the private rental sector. People won’t be able to buy property, which also means that landlords with existing properties now won’t be able to leverage up.”
The Buy To Let Business managing director Ying Tan says: “If the whole market did this then LTVs would be less and people would need to save more to buy a property. That could effect the rental supply.”
However, Tan says he doubts the market will move this way for tax relief reasons as the changes exclude limited company buy-to-let.
Mortgages for Business managing director David Whittaker says: “The Morthgage Works is the first major buy-to-let lender to break cover and acknowledge the significance of the tax changes for personal named borrowers in the years ahead.
“Others will have to follow suit or accept the consequences of CP11-16 applied to them in whatever guise it manifests itself. The opportunity is for those that have limited company offerings that are not impacted by these tax changes to be able to retain stress tests as we currently know them. this will lead to a differentiated stress test, even within the same lender.”
Precise Mortgages managing director Alan Cleary says: “Our view as a business is that the PRA consultation document as it reads at the moment is going to make the buy-to-let market more specialist than it was before. I think high street lenders will move away from the market.
“We are going to keep our eye firmly fixed on the market and make sure we respond appropriately.”
Chadney Bulgin mortgage partner Jonathan Clark says: “We knew that buy-to-let lenders were going to be reviewing their criteria in light of the harsher upcoming tax treatment of landlords but TMW’s sudden move to a 145 per cent stress test across all products and LTVs still came as a bit of a shock. London and the South East will be particularly hard hit as brokers were already struggling to make buy-to-let deals fit criteria. I wonder how much longer other lenders can hold out for?”