Buy-to-let investors pushed to raise rents

Britain’s largest buy-to-let lender, a division of Lloyds, has become the first to restrict landlords’ loans based on their likely tax bills – meaning higher-earning investors will be under pressure to raise rents.

Birmingham Midshires currently requires all borrowers to charge rents equal to at least 125pc of their monthly mortgage costs. But it has said that higher-earning borrowers, who pay tax at the 40pc and 45pc levels, will be subject to tougher requirements.

Tax changes, announced by former chancellor George Osborne and being introduced next year, will begin to remove landlords’ ability to deduct their mortgage costs from their rental income before paying tax. Instead, they will receive a 20pc tax credit.

This means higher and additionalrate taxpayers will be affected more seriously by the change. Some could find they make a loss every month – on which tax is still due.

Some basic-rate taxpayers will also be pushed into the higher-rate bracket because of the extra income.

Previously, 125pc had been the standard amount for lenders to require, but since the start of this year many banks have been increasing the required amount because of concerns over borrowers’ ability to afford loans as the new taxes apply.

Some, such as Nationwide, have moved to require income of 145pc of the landlord’s mortgage costs.

In September the Bank of England released a report telling lenders to take into account a landlord’s wider costs, including tax, when deciding how much they can borrow and whether they can secure a mortgage.

The Bank did not specify a required rental cover ratio in that report, but said that its requirements might lead to the industry standard of 125pc being increased.

Other lenders have indicated that they intend to treat all customers as higher-rate taxpayers by increasing the rental cover requirement for all.

Birmingham Midshires is the first to introduce a different system depending on a borrower’s tax band.

It said that “for higher and top-rate customers, brokers will be able to obtain a rental cover ratio relative to the customer’s individual circumstances.”

It has also increased its maximum age from 75 to 80 and has developed a rental income calculator showing the position for an individual borrower’s circumstances.

It said the changes would be introduced “by the end of the year”.

There is already evidence that rents are being increased ahead of the tax changes, and brokers warned that lending requirements, such as those from Birmingham Midshires, were likely to accelerate the trend.

Lloyds becomes the first lender to restrict borrowing based on tax bills, writes Olivia Rudgard

Russell Watson