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Taking out a mortgage is a common way to build a property portfolio, but landlords are coming under increasing pressure from the Bank of England, which is making buy to let mortgages more difficult to come by.
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The easiest way to deal with this problem is to go mortgage free, but for many landlords, paying down mortgage debt is not an option.
New Affordability Testing
The Bank of England wants to introduce more affordability testing for landlords. Lenders will be required to check a landlord’s expenses, including their tax bill, how many properties they own, and how much mortgage debt they have. Lending will be based on the ratio between your monthly rental income and the cost of your mortgage repayments. The Bank of England has not specified what this ratio should be, but some lenders have already changed their lending policy to 145%.
Paying Higher Rate Tax Hurts Landlords
A landlord’s tax bracket will also play a part in the new affordability rules, so landlords paying 40% tax will have to charge more rent. A new stress rate of 5.5% will be used to assess mortgage affordability, which is higher than the rate currently in use by lenders.
The upshot of these changes is that some landlords will end up stuck with expensive mortgages because they can’t find another deal. Other landlords will have no choice but to increase rents.
Landlords who own their properties through a limited company are less affected by the new affordability conditions, as lenders are more flexible and rates are cheaper.
