With the UK’s biggest building society, Nationwide, tightening its lending criteria for buy-to-let investors, it could become even harder for landlords to invest in the private rental sector.
The building society has cracked down on rental calculations and loan-to-value (LTV) ratios for buy-to-let mortgages, ahead of forthcoming tax changes in the sector.
Buy-to-Let Lending Criteria Gets Tougher
Nationwide’s Mortgage Works – the building society’s buy-to-let arm – is increasing its rental cover requirements from 125% of the loan to 145%. It is also cutting its maximum LTV from 80% to 75% from 11th May 2016.
At present, landlords can claim tax relief on monthly mortgage interest payments at the top level of tax they pay, up to 45%. However, Chancellor George Osborne has introduced new tax rules that will see thousands of buy-to-let landlords’ profits hit, as the amount they can claim as relief will be set at the basic rate of tax, currently 20%.
Some basic rate taxpayers will also be affected, as the change will push them into the higher rate tax bracket. The reduction will be phased in over four years from April 2017.
Property investment firm Armistead Property believes that the tougher lending criteria and recent tax changes will not have a major impact on the housing market as a whole.
The company’s Peter Armistead explains: “This move by Nationwide could trigger other big lenders to follow suit. The banks seem to believe that the Chancellor’s tax crackdown on mortgage tax relief could cause difficulties for landlords. Though the new tax rules are challenging for most landlords, rising asset values and rental income will go a long way to protect profits.
“Landlords have plenty of options available that will help offset the increased taxation. The first thing landlords should do is carry out a serious portfolio review and work out how the tax changes and tougher mortgage lending will affect them and what options there are to save, or make, more money. For example, mortgaging to get a better deal, renovating some old stock – these costs will be tax deductible, selling some properties, or increasing the rent.”
He believes: “Landlords need to think outside the box and ask themselves questions like, ‘Can I buy with cash or with far less leverage?’, ‘Should I incorporate?’, ‘Can I change a house into an HMO [House in Multiple Occupation] and increase the rental income?’, ‘Can I get planning on an existing property to increase its value?’, or ‘Can I add an extension or convert the cellar?’
“Although the Government is trying to curb the buy-to-let market, property investment is robust in the long-term. It is estimated that two million Britons are now private landlords, collectively renting out five million properties. With rising demand for rental property and a growing shortage of accommodation, the buy-to-let market will continue to give a good return on investment.”
The Residential Landlords Association has recently reported that the majority of landlords are thinking of increasing their rent prices.
How will you react to the changes?