Buy to Let Mortgages 1st Jan 2016
in 2016, property investors are certainly facing some challenges. However the upside is that the rental market remains buyant as demand continues to outstrip supply, meaning that the Private Rented Sector remains a popluar asset class for investors. Landlords need to become aware of the best ways of handling their investments - read our top tips on Winning Strategies within The Private Rented Sector in 2016 article. And bear in mind that those with no mortgages or small mortgages will be unaffected by the following changes and so will continue to generate income.
This year, high street lenders are expected to tighten criteria for new applicants, which will in turn leave landlords forced to either increase rents or borrow less. As such, experts now predict that investors will soon require a 50% deposit – or no mortgage at all.
There is no denying the market is starting to overheat, particularly after George Osborne hit the sector with stamp duty tax rises. The Financial Policy Committee previously stated the sector could pose a risk to wider financial stability, citing immigration and demand from tenants as the key drivers of higher buy to let prices. Because of this, many now fear that even more restrictions could be put into place if the Bank of England decides to crack down further on risk within the sector.
Whether action will be taken or not remains speculative. However, as the key ratio between rental income and monthly mortgage costs is set to change, brokers have warned that only investors with larger deposits may qualify for loans in the future.
With the potential of Bank of England lending caps reducing the number of mortgages issued, lenders are likely to rein in buy to let loans of their own accord rather than wait for regulatory crackdown. One of the biggest buy to let lenders in the market has tightened its criteria for those with less than a 35% deposit. Investors now require a monthly rental income of 125% of the mortgage at a 5.49% rate, compared to 4.99% for borrowers with a larger deposit. Equally, others have already raised its criteria for new borrowers, with required rental income increasing from 125% to 135% at a rate of 5.79%.
For existing landlords, profits will be affected under new tax rules, meaning that investors can no longer deduct the cost of mortgage interest from their rental income when calculating a profit. This, combined with the increased stamp duty for private landlords, has the potential to exclude small scale investors in favour of those with much deeper pockets or corporate landlords. Rate rises may equally make it harder for landlords to remortgage when their deal ends, leaving them locked into higher rates. Because of this, you are likely to require more equity if you are looking to invest in a buy to let property.
The future of the sector, however, remains rosy, as there are many possible solutions to the above challenges (see accompanying newsletter article: The Private Rented Sector in 2016, Winning Strategies). Whatever the New Year holds, the longer interest rates remain low, the better chance you have of fixing a great deal before they disappear and change settles into place. To ensure that you’re prepared for any changes set for 2016, as a new or existing buy to let investor or if you wish to find out more about the current buy to let options available, or need some tailored advice then now is the time to speak to an independent mortgage broker.
Elaine Kellington, Private Client Mortgage & Protection Consultant, Clear Mortgage Solutions