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Largest buy-to-let mortgage providers drastically restricts lending

One of the largest buy-to-let mortgage providers has drastically restricted its lending in a move which experts say will be copied by others, and which will make it impossible for some landlords to borrow.

Nationwide Building Society, the second biggest buy-to-let lender after Lloyds Banking Group, will require landlords to receive far more rental income relative to the costs of their mortgage than is currently the case. The change will apply from May 11.

Other lenders are expected to follow suit in a "domino effect" which could mean some landlords will not be able to obtain mortgages at all, brokers said.

Those worst affected are likely to be landlords in lower-yielding areas such as London and the South East. 

The changes are in response to the Bank of England's announcement last month that lenders would face tougher rules when calculating mortgages for buy-to-let landlords.

Experts predicted that investors will need at least a 40pc deposit when buying property as a result of these tougher rules.

The Mortgage Works, the buy-to-let division of Nationwide, has tightened its "rental cover requirement", which is the amount a landlord needs to take in rent compared to the cost of the mortgage repayments. The ratio will go from 125pc to 145pc. 

The cover will be calculated using either the "stress rate", which stands at 5.49pc for loans of 65pc to 75pc or 4.99pc for loan amounts below that. 

Nationwide will scrap  loans for landlords with a 20pc deposit, and will only lend to those with a minimum of 25pc - provided the new rental cover criteria are met.

Nationwide is the first major lender to make a significant change to its criteria following the Bank of England's consultation, which says that banks will have to take into account wider costs landlords might have to pay when letting a property, such as letting agents' fees and tax. 

As well as a response to regulation, the move is also a reaction to a new tax regime for buy-to-let landlords, which will be phased in from April next year.

The new rules mean landlords can no longer deduct the cost of their mortgage interest before calculating their tax bill, and are expected to wipe out profits for many.

Andrew Montlake, of broker Coreco, said that in low-yield areas like London, landlords with less than 40pc deposits would struggle to borrow in future. 

"In London where yields are down to 2 or 3pc you’re only going to be able to get a 60pc mortgage from now on. Landlords are going to have to put more cash in.

"It's likely that these costs will be passed onto tenants, so the cost of renting will go up, too."

Other brokers referred to Nationwide's changes as "brutal".

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: "Some lenders have already increased rental stress rates in response to tax relief changes but not to this extent.

"In a similar pattern to interest-only lending in the years after the crunch, it is likely that other buy-to-let lenders will follow suit in a domino effect.

"It will make it much tougher for landlords to get the numbers to add up, and careful consideration will need to be given before expanding portfolios or indeed investing for the first time," he said. 

David Whittaker, managing director at broker Mortgages for Business, said: “This is the direction of travel for the sector. 

"It will be interesting to see how other providers react. I anticipate a few will be making similar preparation, some will wait until the outcomes of the consultation are known and others will bury their heads in the sand."

Paul Wootton, managing director of The Mortgage Works, said the move was a response to the new tax.

“This change is a proactive move that recognises the need to help safeguard rental cover for landlords over the coming years, and in advance of the forthcoming changes to mortgage interest tax relief," he said.

Last month Lloyds, the market's largest buy-to-let lender, announced that it was pulling back on that part of its business to rebalance it with residential lending.

Existing customers of The Mortgage Works will not be affected by the change if they remortgage, as long as no extra borrowing is involved.