Buy to Let

The accidental landlord: New lending criteria for buy-to-let mortgages will push up costs for landlords

Really? I was momentarily stunned this week to find the building society that gave me a buy-to-let mortgage on one of my rental flats only two years ago is not now prepared to give me a new fixed-rate deal once this one ends in the autumn.

Instead, I’ll be automatically shifted on to its more expensive standard variable interest rate, which will push up my mortgage payments by almost £4,000 a year.

The problem, I’m told, is that in January lenders introduced new criteria for buy-to-let mortgages, so whereas previously they required proof that the rent would cover 125 per cent of the actual mortgage interest payments, now they insist the rent must cover 145 per cent of the mortgage payments if interest rates increase to 5.5 per cent.

This means that even though the rent on my property has risen slightly and the value of the flat has increased considerably since I initially took out the loan, the lender who considered me a safe bet less than two years ago, now thinks I’m toxic.

If I’m not a safe borrower, I don’t know who is. My mortgage is for only 50 per cent of the value of the property and my rental yield is above seven per cent, which is excellent for London.

I can understand lenders applying the new criteria to new borrowers, but it seems ridiculous that they won’t give new fixed-rate deals to existing customers. Ironically, by refusing to do so and shifting us on to their higher standard variable interest rates (SVR) instead, they’re making it more likely that we’ll be unable to afford our mortgages.

In my case, if I have to pay my lender’s SVR, I’ll be left with only a smidgen over £1,000 profit a year, which is barely enough to cover essential repairs and void periods, and there certainly won’t be anything left for future refurbishments. “We’re mortgage prisoners,” I wailed to my husband, and at that very moment, by sheer coincidence, an email pinged into my inbox from one of those online brokers who advertise super-cheap buy-to-let mortgages. Ah-ha, maybe they could help, I thought.

I rang them. They couldn’t. They told me I had no option but to suck up the higher interest rate or reduce my mortgage by at least £10,000 so that I could shift to another lender. I don’t have several thousand pounds tucked up my shirt sleeve so I rang my usual broker, Martin Stewart of London Money, instead. He was reassuringly relaxed about the situation and told me of one or two lenders, including Santander, who are offering attractive deals to existing landlords using the old lending criteria.

They will accept landlords who want to switch from other lenders, as long as they don’t want to increase the size of their loans. Relief! And the interest rate they are offering is less than I’m paying at the moment. I suspect there are many landlords who will be trapped as a result of these new rules and the timing couldn’t have been much worse.

Any landlord who thinks they can put up their rents to improve their mortgage eligibility might find this hard in the current market. I have the impression rents are falling, not rising. Certainly in my area they are down year on year. My advice to others in my situation would be to plan well ahead, and get help from a really good independent financial adviser sooner rather than later.

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