Why you'll soon need a six-figure salary if you want to buy-to-let
As buy-to-let lendersdrastically tighten their loan criteria, experts predict that soon only thosewith very high incomes will be able to borrow to invest in property.
The Bank of England is drivingthe trend with proposals to force lenders to radically scale back on the risk -and volume - of lending.
Major lenders Nationwide andBarclays have responded by increasing the amount of rent that landlords need tocharge, relative to their mortgage costs, before they will grant loans.
Nationwide is thesecond-biggest buy-to-let lender after Lloyds Banking Group. Barclays is alsoamong the top five lenders.
Both now require landlordstaking out new buy-to-let mortgages to receive rent equivalent to 145pc oftheir mortgage costs. This is up from a more standard ratio of 125pc or 135pc.
The change will hit those whoneed bigger mortgages in order to go into buy-to-let, making the investmententirely impossible for many.
The impact in low-yieldingareas - where property prices are high compared to rents, such as London - willbe especially severe.
But while buy-to-let will thusbe ruled out for many middle-class investors, those with very high salarieswill still be able to leapfrog some of these requirements, and borrow enough tobuy a typical property - even in London.
How does it work?
Under new rules, banks willapply a more complex gauge of borrower affordability which will take intoaccount landlords' earned incomes, as well as rent.
To illustrate how Barclay’s"means testing" criteria will work, broker John Charcol ran a seriesof theoretical applications.
A landlord getting a 75pcmortgage with a five-year fix at 3.49pc on a property worth £300,000 would needto be charging rent of at least £1,125 each month.
They would also need to provideevidence of other income, to show that they could afford their existingresidential mortgage.
While someone earningclose-to-average income of £30,000 would not qualify, both a high earner – witha £50,000 salary – and a very high earner – with a £100,000 salary – would beable to get a mortgage.
Within London the picture iseven tougher.
A £500,000 property, boughtwith the same 75pc mortgage at the 3.49pc rate, but charging a rent of £1,562,would be out of reach for all but the highest earner.
The calculations are based onthe assumption that each landlord would have another, residential mortgage of areasonable, affordable value for their income, which the bank would take intoaccount when deciding whether they were eligible for the extra buy-to-letborrowing.
What's happening to the buy-to-let market?
Buy-to-let is changing.
In March Bank of Englandannounced that it will compel buy-to-let lenders to take into account otherfactors when deciding whether or not they can lend to a landlord.
These include increased taxdue to be paid on mortgaged buy-to-lets, an issue which is going to becomeincreasingly important from next April.
From next year landlords willno longer be able to deduct their mortgage interest payments from their rentalincome before calculating their tax bill, meaning that they will essentially bepaying tax on their turnover, not their profit.
Basic-rate taxpayers will belifted out of the effects by a 20pc reduction, but higher and additional-ratetaxpayers with large mortgages are likely to have their profits significantlyreduced.
How will new tax reduce your profit ?
Buy-to-let has historicallybeen an investment option for mainstream investors seeking income and growth,but this seems set to change, brokers warn.
They say the market is likelyto continue to move in this direction - with more lenders starting to take alook at earned income when assessing someone's suitability for a buy-to-letmortgage.
Simon Collins, of mortgagebroker John Charcol, said: “Barclays tended to be very good if you've got a lowyield and high earned income.
“I expect that from now on, evenmore of their buy-to-let will be done on an earned income basis.”
What are the alternatives?
Experts say landlords withoutthe necessary high income or rental cover will turn to other types ofinvestment, such as holiday lets or semi-commercial property.
Some very small landlords, whohave large mortgages and relatively small earned income, might start to sellup.
David Cox, managing directorof the Association of Residential Letting Agents said: "We’re expecting tosee an increase in the number of landlords selling their buy-to-let propertiesover the next 12 months, as a result of the introduction of the changes tomortgage interest relief, which will trigger financial difficulty forlandlords."
Or, increasingly, buy-to-letwill be the preserve of those who don't need mortgages, or who only need smallloans.
Another alternative for thosewho want to stay in the market is to look to areas where yields are higher -such as the North West or Midlands.