Some 45% of 203 brokers polled online by Mortgage Solutions said they expect the new norm for rental calculations to increase to 135% over the next 12 months. A further 39% expect all lenders to calculate rental income at 125%, while 16% expect it to rise to 145% or higher.
Lenders have been making changes to rental cover calculations of late amid concerns that landlords’ affordability will be put under pressure because of tax changes announced in the Summer Budget.
Last year the Chancellor sent shock waves through the industry when he announced that the amount of mortgage interest tax relief landlords can claim would drop from the top rate of 45% to 20% from 2017.
Ying Tan, managing director at The Buy to Let Business, said lender efforts to demonstrate more prudence in buy-to-let lending was “tough” on brokers and their clients.
“With the impending tax relief changes being phased in from 2017 to 2021 and the general focus on affordability and stress testing, it is to be expected that buy-to-let rent calculations are on an upward trend.
“From a lender’s perspective, with responsible lending in mind, this seems prudent as landlords will have less profit. From a broker’s perspective, particularly in London, this is tough as it is not just rental income that drives the investment decision.”
Simon Collins, product technical manager at John Charcol noted that some lenders were beginning to demonstrate innovative affordability calculations following George Osborne’s announcement.
“New Street Mortgage have shown some innovation in realising that not every investor buys for yield, and that many people buy for capital appreciation, especially in London and the South East, and so have looked at rental calculations that better reflect this.
“Lenders and brokers can see some huge future changes in the market, from the tax relief changes that will be phased in from next April, to the increasing possibility of further intervention by the Financial Policy Committee. I think that lenders see self-regulation as a way of hopefully reducing the chances of more formal regulation, and are therefore getting a bit more cautious if borrowers want higher loan-to-values,” Collins added.
However, John Phillips, group operations director of Spicer Haart and Just Mortgages, was sceptical that lenders will become more innovative in how they assess landlord affordability.
But he added: “Due to the increasing competition in the market in terms of buy-to-let lenders, they may improve throughout the year but, as they’ve already completed so much business, it’s difficult to say for certain.
“Every lender will have a yearly target and many will have completed a significant proportion during the first three months of the year in terms of buy-to-let business. Although it is likely that lender appetite will start to change, their yearly target won’t but may well bring it in line with their yearly aspirations.”