Buy-to-let investors will have to stump up an extra £10,000 to get a mortgage under a crackdown on dangerous debts.
Banks and building societies will demand the extra cash from as early as September as part of a last-ditch attempt to stop the buy-to-let boom spiralling out of control.
Powerful watchdog the Prudential Regulation Authority is concerned that some landlords are overstretching themselves and will face difficulties when interest rates rise, so is forcing lenders to run stricter tests to see whether an investor can afford the loan.
Currently, investors have to prove they would earn enough from the rent to cover their repayments, but the new plan demands proof they would still be covered if rates soared by at least 2 per cent.
Experts say this would mean thousands of ordinary borrowers failing the new tests. Many of those who will struggle to qualify for a loan will be savers who have cashed in their pensions to invest in property.
To pass the tests, they will have to either raise rents so much that they would be covered if interest rates soared, or borrow less.
Property experts say it is difficult to put up rents at short notice, so most people would borrow less, which would mean paying a bigger deposit to afford the same house.
Mortgage brokers predict that most people will, in the future, have to put down a deposit of 30 per cent or 35 per cent instead of the 25 per cent which is typical today.
On the average £211,000 property in England and Wales, the extra deposit needed would be at least £10,000. Many investors might need to put down even more.
Ray Boulger, of mortgage broker John Charcol, says: ‘For the majority of buy-to-let contracts, a 25 per cent deposit is going to be a non-starter. You’re looking at a minimum of 30 per cent or 35 per cent deposit in some areas of the country.’
Borrowers most at risk are those with smaller deposits buying in areas where rents are low, relative to house prices - a particular problem in places such as London and the South-East.
Many people in such areas will be smaller investors trying to cash in on the buy-to-let boom with money from their savings or pensions in the hope of investing in a few properties to let.
Rents are high in these parts but have not risen as fast as house prices. To work out if you can afford a mortgage, lenders take your annual rental income and compare it to the amount you want to borrow.
This is called the ‘yield’ on your investment, which will be a familiar term if you have put money into stock market funds, where the ‘yield’ is the regular payout per pound invested.
Under the new tests, banks and building societies will want evidence of a yield of at least 5.2 per cent to qualify for a 25 per cent deposit loan. This would mean earning £7,800 a year from rent on a £150,000 home before paying your mortgage.
This is how lenders will test whether you would be able to afford the repayments if the Bank of England base rate rose from 0.5 per cent today to 2.5 per cent.
According to figures from the buy-to-let lender LendInvest, about half of the areas in London and the South-East produce a typical yield that is much smaller. This includes west London, Kingston upon Thames, Guildford and Tunbridge Wells.
These yields are based on someone putting down the smallest deposit that lenders will accept on a buy-to-let loan - which is currently 25 per cent.
The only ways to make the yield look bigger would be to put down a larger deposit, meaning that you will be borrowing less, or to increase your rents.
Fixed and tracker loans of under five years will be affected. You could opt for a longer-term deal, but monthly repayments are generally higher, eating away at your returns.
For example, The Mortgage Works, Nationwide’s buy-to-let arm, offers the market’s only ten-year fixed rate for borrowers with a 25 per cent deposit.
It costs 4.99 per cent, which would work out at £780 a month on interest-only on a £250,000 property. By comparison, Accord, another lender, has a 3.24 per cent five-year fixed rate for borrowers with a 35 per cent deposit, which works out as £430 a month on the same property.
David Whittaker, of broker Mortgages for Business, says: ‘We are going through a massive period of change, and a short-term deal might drop you in a mess in a few years’ time.
‘A five-year deal, providing it is not too much of a differential to what you have now, might be a sounder option.’
HSBC is offering a five-year deal at 1.99 per cent with a 35 per cent deposit and a fee of £1,499. Leek United Building Society has one at 2.25 per cent, with a deposit of 25 per cent and fees of £995.
Some lenders have already brought in tougher lending criteria. Beginning next week, The Mortgage Works will ask landlords to ensure that the rent they receive is 145 per cent of their monthly mortgage repayment, instead of the 125 per cent required now. If that is not possible, the loan will be refused.
Sam: 10th May 2016 11:20:00
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