To access the best mortgage rates
Due to tax changes next year relating to buy-to-let property, banks and lenders are being encouraged to stress-test their applicants more rigorously against new guidelines. These guidelines are expected to be enforced in due course and could result in higher deposit requirements for landlords.
This does not constitute advice and advice should be sought in all instances before acting on it.
Your property may be at risk should you be unable to maintain any agreed mortgage payments over the term agreed.
Tax changes on buy-to-let in 2017
From April 2017, landlords will not be able to claim as much tax relief on their mortgage interest, which will cause their profit margins to be trimmed significantly, as more tax will become due.
The incentive, which is being phased-in from 2017 to 2020, will eventually mean landlords can’t claim any mortgage interest at the higher rate of tax.
It affects any landlord with a mortgage paying higher rate tax. Those without a mortgage, or only claiming tax relief at the basic rate will be unaffected.
Tightening legislation for lenders regarding buy-to-let
These tax changes have instigated a host of new guidelines by the Bank of England (BoE).
The BoE now recommends that applications are stress-tested to ensure the borrower can afford a mortgage at 5.5 percent interest, and that their rental income covers at least 145 percent of their mortgage.
At present, lenders are only encouraged to make changes to their lending policy for buy-to-let mortgages, however regulations are tightening across the board and are expected to be enforced in time.
A selection of banks including Barclays, TSB and Nationwide are already stress-testing applications at 145 percent rental cover to keep ahead of changing regulations.
Avoiding properties with low rental yields
The difficulty with the new stress-testing is mainly for areas where rental yields are low yet property prices remain high. Here, proving that the rental income can cover 145 percent or more of the mortgage can be difficult.
For example, research conducted by Property Partner showed that in areas such as Worcester, Cambridge, Chichester and Bedford, a 60 percent deposit would be required to meet
“Average house prices in Worcester are £188,694. Average rent is £492. This means rental yields are less than 4 percent. Landlords would therefore need a 61 percent deposit to qualify” Property Partner
Higher deposit – better access to low rates
Landlords with high deposits are likely to still be able to access low rates of interest for buy-to-let mortgages.
Experts suspect that lenders could move to creating new products only available to low-risk landlords that more-than-meet the new regulations.
So what can you do if you are looking to invest in a rental property?
- Save a decent deposit to access better rates
- Choose a good location for your investment – where rents are high
- Shop around for the best mortgage – some lenders will offer more favourable terms than others
- Lean on a broker – a broker will know which deals suit your situation
A mortgage broker can also look at your current assets and see if there is the potential to re-mortgage other properties to free up equity for a bigger deposit in a new investment.
Need help with finding a Buy-to-Let mortgage?
If you would like us to undertake a review of your current mortgages or you are thinking of purchasing a buy-to-let property in the near future, please contact Chris for a free, no obligation appraisal.
Tel: 01403 780 770