Britain’s biggest buy-to-let lender is bringing in new rules that could force some landlords to raise rents or make it more difficult to get a mortgage.
Birmingham Midshires is introducing new buy-to-let mortgage rules for landlords based on their tax bills.
At present, Birmingham Midshires, a subsidiary of Lloyds Banking Group, requires borrowers to charge monthly rents that cover at least 125% of their mortgage repayments.
It has now said that borrowers who pay higher or additional rate income tax will be subject to tougher requirements.
It’s the first bank to introduce separate lending criteria based on a landlord’s income tax bracket, but may not be the last.
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New tax rules around the corner
Starting next April, landlords will see the amount of mortgage tax relief they can claim gradually reduced to 20% between 2017 and 2020.
The change will mean landlords who pay higher or additional rate income tax will be affected more significantly by the change than basic-rate taxpayers.
The increased tax bill will eat into landlord’s income, leaving lenders concerned about their ability to repay their mortgages.
In September, the Bank of England called for lenders to take into account a landlord’s wider costs, including their tax liabilities, when deciding if they could afford the repayments on a mortgage.
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‘Reflecting individual circumstances’
Some lenders, including Nationwide, reacted to this by simply increasing the amount of rental cover on the mortgage repayments from 125% to 145% for all buy-to-let borrowers regardless of tax status.
Birmingham Midshires has said that higher and additional rate taxpayers will be offered a rental cover ratio that reflects their individual circumstances.
Critics say that increasing the rental cover ratio means landlords will be forced to put rents up in order to be able to get a buy-to-let mortgage.
Rents are already at record highs with the average in England and Wales sitting at £887 and in London it is even higher at £1,391, according to Your Move’s Buy-to-Let Index.
Rents have been rising rapidly this year as landlords prepare for next year’s tax change and act to stop it eating into their returns.
The changes to lending criteria from buy-to-let lenders could result in rents rocketing even further skyward.
Read more on loveMONEY:
Opinion: the clampdown on landlords is long overdue
What buy-to-let changes will mean for investors
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