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Tougher buy-to-let mortgage lending criteria

Many landlords risk being caught out by recent changes to lending criteria for buy-to-let mortgages unless they start to plan ahead as soon as possible.

Since January 1st this year, banks and building societies have been obliged to apply new affordability tests to buy to let mortgages, which might mean some landlords won’t be able to borrow as much as they’d hoped.

Under new stress tests imposed by the Prudential Regulation Authority, landlords must be able to show that the rent earned will be at least 25% more than their mortgage interest repayments, even if interest rates go up to 5.5%.

Some lenders have gone a step further and will now only lend to landlords whose rent is at least 45% higher than their interest repayments.

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What rental yield should you aim for?

The changes mean that landlords buying a property with a 25 per cent deposit, which is fairly standard, will need to achieve a rental yield of at least 5 to 6 per cent to qualify for a mortgage.

That might not sound too onerous, but in London and other cities where property prices are high, yields are typically only 3% to 4%.

Clearly the new rules have made it harder for new would-be landlords to enter the market, but they have also created a major headache for existing landlords who are looking to remortgage.

Many will find that they aren’t able to access the best deals on the market because don’t fulfill the new lending criteria. As a result, those whose fixed or tracker rates are due to expire could find they have no option but to move onto their current lender’s more expensive standard variable rate.

Upad’s own research revealed that more than half of all landlords are planning to remortgage in the future, more than a quarter of whom would like to increase their loans. Some might struggle.

What can you do to make sure you get the best deal?

  • If possible, pay off some of your loan so that your rent covers a higher percentage of your interest repayments. The best mortgage deals are available to those looking to borrow 60 per cent or less of the property’s value. 
  • Look at your portfolio to see if you can spread your borrowing more evenly across your properties, rather than taking a higher loan to value (LTV) on one.
  • If planning to buy your first property, look at ways of raising a bigger deposit, perhaps by re-mortgaging a residential property to release some equity, or buy with a partner who has funds to invest. 
  • Consider locking into a long-term fixed rate, for which the stress test might be less strict as your payments won’t increase during the term of the mortgage. 
  • If you’re stuck with your existing lender, see if they will offer you a fixed rate or tracker loan on more favourable terms than their standard variable rate (SVR) – they should give you the same deals made available to new borrowers. 
  • If you haven’t increased your rent for a while, you should probably consider doing so before you apply to remortgage.

For more information on upcoming mortgage and tax changes, sign up to our webinars, or watch previous webinars, here.

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