Landlords face harshest restrictions yet on mortgage lending

BRITAIN’S biggest buy-to-let mortgage lender is preparing to hit landlords with the toughest crackdown seen yet, ahead of the Bank of England gaining new powers over the market next year.

On Monday Lloyds’ buy-to-let lending arm, BM Solutions, will impose an affordability regime which will become the first to restrict landlords’ loans based on their likely tax bills, and will hit higher-earning investors the hardest.

Lloyds is the last of the big lenders to impose new tougher restrictions, with other banks having imposed harsh rules in recent months in anticipation of a government crackdown on landlord lending. Although the rules do not come in until Jan 1, in practice from Monday most landlords searching for mortgage deals will need far bigger deposits, or will have to charge more rent than in the past to meet lenders’ new standards.

Under Lloyds’ new policy, higher rate taxpayers earning over £43,000 could be rejected if they earn less than 56 per cent profit from their rental property, while additional rate taxpayers earning over £150,000 face having to make 67 per cent profit to get a mortgage, according to brokers’ estimates.

This is stricter than the Bank’s new minimum standard which will require investors to prove they can make a minimum profit of 25 per cent from tenants even if large interest rate rises make their mortgage more expensive.

Tax changes, 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 20 per cent tax credit. This means higher and additional rate taxpayers will be affect- ed 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.

Lloyds declined to provide the details of the new rules, claiming the tests would be done on an individual basis.