Buy to Let

Landlords locked out of buy-to-let

Christina Hoghton
Written By:
Christina Hoghton

Stricter lending criteria means landlords need to find bigger deposits to purchase buy-to-let properties

Landlords could need to stump up enormous deposits of at least 40% in two-thirds of major towns and cities, if proposed stricter lending requirements are brought into play.

The Bank of England has already consulted on potential new affordability checks for buy-to-let mortgages, including interest coverage ratios of 145%.

These ‘stress tests’ could 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.

All of this is designed to protect landlords from borrowing too much, and lenders from lending too much, but there are concerns it will make it much harder for landlords to get a mortgage.

Changes afoot

Most lenders stress-test their mortgages so that rental income covers 125% of mortgages payments but others have already tightened their criteria ahead of the new rules. Barclays and the Nationwide have both reset their income coverage ratios to 145%.

If, on guidance from the Bank of England, 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.

Crowdfunding platform 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 ratio would require a landlord buying an average-priced property there to put down at least a 61% deposit, or £115,000 in cash terms – minimum.

In addition, potential buy-to-let landlords in the commuter belt including Chichester, Chelmsford, Bedford and Reading, also face tough lending restrictions.

Dan Gandesha, CEO of Property Partner, said: “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.”