# Beached

## Landlords’ mortgage trap

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