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Buy-to-let lenders to face tougher checks

UK mortgage lenders are now expected to restrict lending to buy-to-let borrowers following the Mortgage Works’ decision to limit the amount landlord investors can borrow.

The Mortgage Works, the buy-to-let division of Nationwide, announced late last week that it will, from 11 May, require landlords to receive significantly more rental income relative to the costs of their mortgage than is currently the case.

The Mortgage Works has tightened its rental cover requirement – the amount a landlord is required take in rent compared to the cost of the mortgage repayments – from 125% to 145%.

The change means that Nationwide will no longer lend to landlords with a 20% deposit, and will only lend to those with a minimum of 25%, provided the new rental cover criteria are met.

The changes are in response to the Bank of England's announcement in March that mortgage lenders would face more stringent regulations when calculating mortgages for buy-to-let landlords.

Many experts now forecast that property investors will require a minimum 40% deposit when acquiring property as a consequence of these tougher rules.

David Whittaker, managing director at broker Mortgages for Business, said that he was not surprised to see that lenders are starting to increase their income cover ratios for individual borrowers.

He commented: “As one of the biggest mainstream buy-to-let providers, The Mortgage Works is taking the lead and demonstrating to the market and the regulators that it truly understands the forthcoming tax relief changes. It will be interesting to see how other providers react.

“I anticipate a few will be making similar preparation, some will wait until the outcomes of CP11/16 [Recovery and Resolution Plans] are known and others will bury their heads in the sand. ICRs [interest coverage ratio] on products for limited companies will remain generally the same as they are now because these borrowing vehicles will not be subject to the new tax relief restrictions. Indeed, it will be the lenders with products in this category who will be the likely winners out of this in the long term.”

Some experts believe that in low-yield areas like London, landlords with less than 40% deposits will struggle to borrow in future.

Andrew Montlake, of broker Coreco, said: “In London where yields are down to 2% or 3% you’re only going to be able to get a 60% mortgage from now on. Landlords are going to have to put more cash in.

“It's likely that these costs will be passed onto tenants, so the cost of renting will go up, too.”

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