Middle-class ‘buy-to-let dream’ is over – as mortgage lenders to demand 40pc deposits
Investing in buy-to-let property is on the verge of becoming unaffordable for middle-class savers as stricter lending rules mean they will soon need at least a 40pc deposit to qualify for a mortgage, Telegraph analysis reveals.
New, tighter lending criteria set to be enforced as early as this autumn by the Bank of England will lock large groups of savers out Britain’s rental market, and limit it to an elite club of wealthy investors only.
Under the new system borrowers are likely to have to find nearly twice as much money for a down payment on a property than at present, as around half of buy-to-let mortgages sold today only require a 25pc deposit, according to figures from Mortgages for Business, a broker.
Until recently middle-class savers have helped fuel a buy-to-let boom in Britain with thousands funnelling their life savings into buy-to-let to help fund their retirement.
But now it appears buy-to-let may have had its heyday as The Bank is forcing lenders to “toughen up” over concerns they have relaxed standards for landlords, creating the conditions for a disastrous property crash.
Most lenders’ “stress tests”, which tell if someone can afford a mortgage, currently assume borrowers pay interest at 5pc, and that their rental income will be 25pc higher than their mortgage.
Based on these criteria and the figures for the average UK home worth £202,436, and tenants paying the average UK rent at £764 a month, the average the minimum deposit typically required to obtain a buy-to-let mortgage is £55,741 (27.5pc).
But in March The Bank of England recommended that interest assumptions should rise to at least 5.5pc, and this will be confirmed later this year after a formal consultation.
Some lenders are already getting stricter following the Bank’s warnings, for example this week Nationwide, one of Britain’s biggest lenders, requires borrowers to earn rental income which is 45pc higher than their mortgage, up from the usual 25pc.
Other lenders will follow suit in a “domino effect”, brokers said last week.
Calculations done for the Telegraph by John Charcol, a mortgage broker, reveal to to qualify for one of Nationwide’s new deals, a landlord buying the average UK home with a mortgage needs a £83,349 (41.2pc) deposit.
This is based on an interest-only deal requiring a £75,728 (37.4pc) deposit, plus £7,621 (3.8pc) stamp duty.
And if the change proposed by the Bank of England goes ahead, Nationwide would have to tighten its rules even further, as it would raise the interest rate it uses in its stress tests from 4.99pc to at least 5.5pc. This could increase the deposit required to obtain a mortgage by 5.8pc to £95,144, or 47pc of the purchase price.
The calculations show the effect of the changes will be even more extreme in more expensive areas where rental yields tend to be lower, with London and the South East on track to move well out of reach for most amateur landlords.
Based on an average London property on the market at £500,000 and tenants paying the average London rent of £1,540 a month, a landlord would need a £255,407 (54pc) deposit to qualify for a Nationwide mortgage. This is based on an interest only mortgage requiring a £244,593 deposit (48.9pc), plus £30,000 for stamp duty.
The move is just the latest in a string of measures designed to cool the buy-to-let market, as changes introduced last month mean any buy-to-let property worth more than £40,000 now attracts an additional 3pc stamp duty charge. The Government is also reducing tax relief on buy-to-let mortgage interest payments from April 2017, a move which will hurt borrowers with big mortgages. Experts said it was also a major driver behind lenders becoming more cautious.
Ray Boulger, senior technical manager at John Charcol, who conducted the analysis, said the move would be a “huge” blow to middle-class landlords looking to buy or remortgage in order to raise equity to expand their property portfolio. He said: “This will be gutting for people who can’t afford to remortgage their properties as they may find they have to sell.”
Andrew Montlake, director at Coreco, a mortgage broker, said: “This will hit amateur landlords hard, but the wealthiest investors will remain unaffected. The buy-to-let market is very much alive and well as professional landlords have enough cash available to steer through these changes.”