Beached

Land­lords’ mort­gage trap

The Daily Telegraph - Your Money - - FRONT PAGE -

Many buy-to-let in­vestors who bought their prop­er­ties un­der old af­ford­abil­ity rules may now find that they can’t re­mort­gage. New rules in­tro­duced on Jan­uary 1 this year re­strict the amount that buy-to-let land­lords can bor­row.

But they will also af­fect thou­sands of cur­rent buy-to-let land­lords whose prop­er­ties were bought be­fore the new rules were brought in and who now want to re­mort­gage.

Pre­vi­ously many lenders al­lowed land­lords to bor­row on the ba­sis of whether they would be able to cover 125pc of their mort­gage costs with their rent if their mort­gage rate rose to a “stress rate” of 5pc.

Now, how­ever, most large lenders have in­creased these fig­ures to 145pc of their mort­gage costs and a “stress rate” of 5.5pc.

Whether or not land­lords are af­fected will de­pend on the size of their mort­gage rel­a­tive to the value of the prop­erty.

Fig­ures from An­der­son Har­ris, a mort­gage bro­ker, show the amount of mort­gage debt that would put a bor­rower in dan­ger of fail­ing the new af­ford­abil­ity tests. This means that they could end up stuck on an ex­pen­sive stan­dard vari­able rate un­less they could put more money into the prop­erty to make their mort­gage smaller.

The other op­tion is to in­crease the rent. How­ever, lenders will ask a val­uer for a re­al­is­tic mar­ket rent in the area con­cerned and will only al­low cal­cu­la­tions on this ba­sis, so the fig­ure used has to be achiev­able.

The risk is more press­ing in some ar­eas than oth­ers. Here we look at three dif­fer­ent sce­nar­ios.

One-bed­room flat on the south coast – 5pc rental yield

This is a rel­a­tively typ­i­cal sit­u­a­tion – the av­er­age buy-to-let yield is 5pc. The prop­erty value is £200,000 and the an­nual rental in­come £10,000.

When lenders re­quired land­lords to show that they could make 125pc of their mort­gage costs if their mort­gage rate rose to 5pc, the land­lord would have been able to bor­row £160,000, which means they would have needed eq­uity of 20pc.

Now, the land­lord must show they can make 145pc of their mort­gage costs if their mort­gage rate rises to 5.5pc. This means they could re­mort­gage only £125,391, which would re­quire eq­uity of 37pc.

One-bed­room flat in Chelsea – 3pc rental yield

In low-yield ar­eas such as Lon­don, land­lords are more likely to strug­gle. The prop­erty value is £750,000 and the an­nual rental in­come £22,500.

When lenders re­quired land­lords to show that they could make 125pc of their mort­gage costs if their mort­gage rate rose to 5pc, the land­lord would have been able to bor­row £360,000, which means they would have needed eq­uity of 52pc.

Now, the land­lord must show that they can make 145pc of their mort­gage costs if their mort­gage rate rises to 5.5pc. This means they can re­mort­gage only £282,132, which would re­quire eq­uity of 62pc.

One-bed­room flat in Birm­ing­ham – 7pc rental yield

Where yields are high­est, the new rules will have much less im­pact. In this sit­u­a­tion, the prop­erty value is £150,000 and the an­nual rental in­come £10,500.

When lenders re­quired land­lords to show they could make 125pc of their mort­gage costs if their mort­gage rate rose to 5pc, the land­lord would have been able to bor­row £168,000 – which is more than the value of the prop­erty.

Now, the land­lord must show they can make 145pc of their mort­gage costs if their mort­gage rate rose to 5.5pc. This means they can re­mort­gage £131,662, which is more than the 80pc of the prop­erty’s value, re­quir­ing eq­uity of less than 20pc.

Land­lords who own prop­er­ties on the south coast (above, the beach at Hast­ings) and earn a typ­i­cal rental yield of 5pc could be forced to put in ex­tra eq­uity if they want to re­mort­gage be­cause of stricter lend­ing rules

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