New rules make buy-to-let mortgages harder to access and more expensive

 In Property

A raft of new legislative changes is threatening to make life increasingly difficult when it comes to buy-to-let mortgages.

Many of the previous Chancellor’s rule changes came into effect during late 2015 and 2016. This is meant to help first-time buyers onto the property ladder.

However, two new conditions have come into force from 2017. We are starting to see the effects of the first, which began in January. Early September saw the introduction of the second, and it may take a while for it to come to fruition.

Here, we’ll look at these rule changes and what they might mean for buy-to-let mortgages.

What are the new rules surrounding buy-to-let mortgages?

The new rules concern responsible lending and stress testing:

1) Responsible lending

As of September, buy-to-let mortgage lenders must consider the profitability of a landlord’s entire property portfolio before confirming an arrangement for a new property.

This is part of an effort to minimise irresponsible lending. These new rules were put in place following recommendations from the Prudential Regulation Authority, part of the Bank of England.

In essence, every property within a portfolio should now be individually viable, with rental yields comfortably exceeding mortgage repayments.

Some lenders will still offer buy-to-let mortgages to landlords whose wider portfolio allows for other properties to make up a shortfall, but many will not.

2) Stress testing

January’s rule change meant that buy-to-let landlords have to reach a new benchmark in terms of confirming the financial viability of new properties. This must happen before a lending agreement is put in place.

Historically, landlords were required to prove that rent would cover 125% of mortgage repayments. This gave contingency for any maintenance costs or empty periods associated with their property.

Since the start of the year, this figure has risen to 145% of mortgage repayments. This is to ensure landlords can continue making repayments, even if interest rates were to hit as much as 5.5%.

Many lenders will now also demand proof of rental income and a clearly-defined business plan before formally approving a mortgage application.

This has created a climate where landlords considered ‘safe’ two years ago, may now be too risky for lenders – even with a 50% LTV and high rental yield for the locality.

When landlords with fixed-rate agreements attempt to renew, they may be offered a standard variable rate contract instead. In some cases, they may move to them automatically. Changing rates in this way could push up landlords’ mortgage repayments by thousands of pounds.

However, some lenders are taking the lead in providing deals for existing landlords under the previous lending criteria – providing they aren’t seeking to increase the overall size of their loans.

In such a turbulent market, and with so many factors to consider, it pays to get some bespoke buy-to-let accountancy advice. 3 Wise Bears has the experience and in-depth knowledge to help you ride out these changes and maintain a profitable enterprise.

Call on the friendly 3 Wise Bears team for more expert buy-to-let accountancy advice.

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