But-to-let landlords face paying an extra £6,700 on their mortgages when new rules forcing them to take out longer term loans are introduced at the start of next year.
Many landlords currently choose to take out two-year deals because they are cheaper than longer-term loans. But the Bank of England’s Financial Policy Committee plans to make it harder for landlords to secure short-term mortgages after being granted greater powers over the buy-to-let market by the government.
Regulators have expressed concern about aggressive buy-to-let lending practices at some banks, mainly because they fear that a number of property investors are taking on too much debt and will not be able to cope when interest rates increase.
They want to see more landlords sign up to longer-term five-year rates which tend to be higher, meaning that borrowers could have to pay thousands of pounds more over the life of the loan.
The £6,700 figure is based on a £150,000 loan at the best two-year rate of 1.59% – £199 a month – compared with borrowing the same sum at the best five-year rate of 2.49% – £311 a month.
Over five years, the additional £112 a month would mean the borrower paying £6,720 more.
“A lot of landlords won’t qualify for a two-year deal, so they have to prepare themselves for a potential hike in their mortgage payments,” said Andrew Montlake, of London based mortgage broker Coreco.
The crackdown by the Prudential Regulation Authority comes into force in January 2017 and will see lenders conduct tougher “stress tests” to ensure borrowers can repay their mortgages if interest rates rose to 5.5%.
The average buy-to-let rate is currently 3.4% and, from the start of January, lenders will check if landlords are collecting enough rent to absorb the difference.
Over the last few months we have seen several lenders increase stress tests for personal borrowers from 125% to 145%, whilst maintaining stress rates at 125% for those borrowing via a corporate vehicle.
From a landlord’s perspective, it has been a tough year, with a raft of changes designed to bring the booming buy-to-let market under control.
Aside from more stringent lending conditions, the 3% stamp duty surcharge was introduced in April, while the 10% Wear and Tear tax relief for landlords who rent out furnished homes has been abolished, leaving them free to only claim for the amount that they have spent. What’s more, mortgage tax relief is set to be phased out from April 2017.
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