New Affordability Test for Buy to Let Mortgages

Further Crackdown on Buy to Let Mortgages

Following on from George Osborne’s announcement in the 2015 Autumn statement, which removed landlords’ ability to deduct the cost of their mortgage interest repayments from their rental income, which lowered the tax payments on their rental profit, the government is introducing a further measure that could affect the buy tolet market just as much. The new measure is a stringent mortgage affordability test. This news article looks at this news in more detail.

What are the new Rules?

The additional rules on buy to let mortgages were announced by the Chancellor, Philip Hammond, and it is expected that it will result in investors being able to borrow far less for a buy to let mortgage.

From January 1st, 2017, the Prudential Regulation Authority – the Bank of England’s lending arm - will implement a mandatory new minimum affordability threshold on buy to let mortgage applications. Borrowers will now have to prove that they can make a 25% profit margin from the rent they receive from tenants, or their application will be rejected. Applications will also be rejected if borrowers cannot prove that they would be able to afford their mortgage repayments if interest rates rise to 5.5% or more.

Under our current ultra low interest regime, mortgage repayments are very low too, whilst rents are high. This has led to a boom in the buy to let market as an investment, further fuelled by the decline in pension annuity rates, and it’s easy to see why.

Firstly, with ‘Bank Rate’ currently at the historical low of 0.25%, many buy to let mortgages are available at below 2%. Under this regime, making a good profit is reasonably straightforward, as the PLA’s example shows:

“........... someone with a £200,000 interest-only mortgage borrowing at1.79 pc would have monthly mortgage payments of £299.”

The rent charged is likely to be much higher than this, and even after the mortgage repayment and all other costs and expenses have been deducted, the buy to let landlord is highly likely to be left with a profit well above 25%. However, the Prudential Lending Authority points out that:

“..............these mortgage repayments would rise to £917 if the rate of repayment interest rose to5.5 per cent, and the buy to let landlord would then need to prove they could charge rent of £1,146 a month to be approved for the mortgage."

Under these circumstances it is easy to see why many applications will be rejected. Of course, we don’t know what is going to happen to mortgage rates in the future, but it is easy to speculate that there is only one direction in which they can go, and that is upwards. If interest rates then move upwards quickly, it is easy to see high numbers of buy to let investors being unable to make their mortgage repayments, let alone make a profit, leading to considerable market volatility.

So is this the end for Buy to Let Investors?

The simple answer is no – there will always be some people who can still afford to enter the buy to let market. It will likely mean, however, a considerable reduction in the number of buy to let investors, principally those who were only able to invest due to the low interest regime.

Quite how big this reduction will be, only time will tell. One thing is for certain, however, and that is that along with the new stamp duty changes, these new rules will add further complexity and cost pressure to the buy to let market.

If you are looking to enter the buy to let mortgage market, this means that getting the best possible deal is more important than ever. Senate Money has access to all of the lenders in the buy to let mortgages market. We know how the buy to let market works, what the lenders are looking for, given the new rules and regulations. Providing you can pass the new affordability rules when they come in, we guarantee to get the best possible deal for you.

Contact us or call us on 01675 443878 for an initial chat.