Buy-to-let landlords could be forced to pay an extra £10,000 to get a mortgage after a crackdown on dangerous debts by UK lenders.
The new clampdown on dangerous debts by lenders is driving up mortgage costs for investors to around £10,000. It is expected that banks and building societies will start implementing new hefty charges from September this year.
Buy-to-Let Landlords to Pay Extra £10,000 in Mortgage Crackdown
The Prudential Regulation Authority, the financial services watchdog, is concerned that some landlords are overstretching themselves and will face difficulties when interest rates finally rise. As a result, it is forcing mortgage lenders to introduce stricter tests to determine whether an investor can afford the loan.
At present, buy-to-let landlords must prove that they will earn enough from rental income to cover their mortgage repayments. However, the new plan will demand proof that they would still be covered if interest rates rose by at least 2%.
Under the crackdown, banks and building societies will require evidence of a yield of at least 5.2% to qualify for a 25% deposit loan. This would mean that landlords must earn £7,800 per year from rent on a £150,000 property before paying the mortgage.
To pass the tests, investors will have to either raise rents to ensure they would be covered if interest rates soared, or reduce borrowing.
Armistead Property’s Peter Armistead believes that savvy landlords can absorb the new charges by buying cheaper properties with higher yields.
He explains: “Clearly the investors most at risk are those with smaller deposits who buy property in parts of the UK where rents are low compared with house prices. This is a particular problem in places such as London and the South East, where the average annual returns between 2010-15 were just 4.86% in outer London and 4.71% in the city, according to LendInvest. House prices in London are about five times what they are in parts of the North West, but salaries are only 30% higher.
“Manchester and Liverpool deliver some of the best rental yields, with Manchester recording average annual rental yields of 6.02% over five years, followed by Liverpool, with 5.15% yields. An average residential property in Manchester is just £155,000, while a flat in a good area costs as little as £120,000. A property in Manchester can provide a 5% minimum cash rental yield and a typical 12% total cash yield, including 7% capital appreciation. Demand for rental accommodation is strong and by comparison with other regions, housing is cheaper.”
He adds: “Landlords will find the best returns in urban areas with a concentration of students and young professionals. If investors can purchase cheaper properties with better yields, they will have the opportunity to protect and boost their profits in the longer term.”