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Buy-to-let landlords could be forced to stump up more than 60% deposits in some locations, if all lenders introduce stricter borrowing requirements, according to research by the property crowdfunding platform Property Partner.
The Bank of England recently completed a consultation on new affordability checks for buy-to-let mortgages. These 'stress tests' include an assumption that rates reach 5.5%, as opposed to the current historic lows. And when calculating how much to lend, banks will also need to factor in the landlord's costs of letting the property, and any tax liability.
Most lenders currently stress-test their mortgages so that the rental income covers 125% of mortgages payments. But ahead of the Bank of England's Financial Stability Report today, some providers are already tightening their rules, including Barclays and the Nationwide, who have reset their Interest Coverage Ratio ICRs at 145%.
If, on guidance from the Bank of England, all other lenders follow suit, purchasing a buy-to-let property with a mortgage will be significantly harder in 59 out of 85 major towns and cities in the UK, without a deposit of at least 40%.
Property Partner analysed mortgage affordability across 85 towns and cities, setting the Interest Coverage Ratio at 145%. Worcester in the West Midlands came top of list with the highest financial barriers to entry. The increased ICR would require a landlord buying an average-priced property there to put down at least a 61% deposit, or £115,000 in cash terms - minimum.
The following table shows the top 20 UK towns and cities where would-be landlords face the highest financial barriers to entry.
City/Town | Region | Average house prices (£) | 5.5% BTL Mortgage interest rate pcm x 145 ICR | Average rent (£) | Deposit needed to cover 145% ICR | Minimum value of deposit required £ |
Worcester | West Mids | £188,694 | £489 | £492 | 61% | £115,103 |
Cambridge | East | £450,301 | £1,197 | £1,200 | 60% | £270,181 |
Chichester | South East | £346,511 | £944 | £950 | 59% | £204,441 |
Bedford | East | £256,074 | £715 | £725 | 58% | £148,523 |
Lichfield | West Mids | £214,279 | £598 | £598 | 58% | £124,282 |
Stevenage | South East | £259,954 | £760 | £775 | 56% | £145,574 |
Chelmsford | East | £300,534 | £899 | £901 | 55% | £165,294 |
Reading | South East | £295,729 | £904 | £923 | 54% | £159,694 |
Gloucester | South West | £178,363 | £545 | £550 | 54% | £96,316 |
Warwick | West Mids | £284,182 | £888 | £895 | 53% | £150,616 |
Maidstone | South East | £267,132 | £834 | £850 | 53% | £141,580 |
Poole | South | £278,615 | £889 | £901 | 52% | £144,880 |
Woking | South East | £403,863 | £1,288 | £1,313 | 52% | £210,009 |
Rugby | West Mids | £204,618 | £666 | £675 | 51% | £104,355 |
Cheltenham | South West | £242,062 | £788 | £793 | 51% | £123,452 |
Colchester | East | £227,804 | £742 | £750 | 51% | £116,180 |
York | North Yorks | £234,795 | £765 | £776 | 51% | £119,745 |
Exeter | South West | £231,661 | £770 | £776 | 50% | £115,831 |
Warrington | North West | £165,412 | £550 | £550 | 50% | £82,706 |
Winchester | South | £386,372 | £1,284 | £1,300 | 50% | £193,186 |
Dan Gandesha, CEO of property crowdfunding platform Property Partner, said: "Traditional buy-to-let landlords have had it tough of late with successive assaults on their potential income. The stricter lending rules expected to be introduced by the Bank of England follow April's stamp duty surcharge of 3% for buyers of second homes and buy-to-lets.
"And from April 2017, the gradual withdrawal of mortgage interest tax relief will put further restraints on landlords' profits.
"This lending squeeze will only increase the financial barriers to entry to the market, restricting access to only cash buyers or those with hefty deposits, and potentially forcing some existing landlords to sell up.
"Highly-leveraged landlords seeking to remortgage could face a nasty shock, if their bank tells them they no longer qualify for the same loan to value mortgage.
"But these days there are simpler and much more accessible ways to invest in bricks and mortar, without the hassle and risk of buying individual properties on your own. Similar to cash buyers, investments through Property Partner will be unaffected by the stricter criteria."
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