Increased Rental Cover on BTL Mortgages Limits Landlord Options
Posted on 8 December 2015 by
Following the recent move by Woolwich to increase its rental cover requirement in response to the income tax changes announced in the summer budget, on Friday 11 December Godiva, a subsidiary of Coventry Building Society, will follow suit where the LTV is in excess of 65% or the product chosen is anything other than a fixed rate for at least 5 years.
Currently, Godiva calculates rental cover at 125%, based on the higher of pay rate and 5% (which in practice currently means 5% in every case). This will not change for LTVs up to 65% but above 65% it will be increased to 125% at the higher of pay rate or 5.5% on fixed rates of less than 5 years and on all variable rates.
Godiva’s maximum LTV is 75% but in practice for short term fixed rates and variable rates the steeper rental cover requirement above 65% will make it difficult for many landlords to qualify for a 75% mortgage unless they choose a 5 year fix (the maximum fixed rate term Godiva currently offers).
It is inevitable that many other lenders will change their rental cover requirements over the next few months, but the detail will vary.
Rather than using the same calculation in every case I think the Godiva approach is sensible as it factors in the two key risk factors, LTV and interest rate security.
It is also worth bearing in mind there is more than one way to end up in the same place, i.e. increase the rental cover percentage, say from 125% to 135%, or leave it unchanged but increase the rate used for the calculation. For example, Woolwich’s new calculation basis is 135% @ 5.79% but 125% @ 6.25% would have produced the same result.
Some lenders will prefer to increase the 125% figure and others the interest rate, whilst some may do a combination of both.
Two things which are certain in the BTL market over the next few months are:
- More lenders will increase their rental cover.
- More lenders will start offering Buy To Lets for SPVs (Special Purpose Vehicles, normally a limited company).
I expect the premium on BTL interest rates for SPVs, compared to rates for mortgages to individuals, to progressively decrease next year as more lenders open up their lending to SPVs. Lenders require a Personal Guarantee from the director(s) when lending on a BTL through an SPV and so their risk is no higher than lending the same amount on the same property if it was owned personally by the same director(s). There is, however, some additional work involved in the initial underwriting as the lender, or its solicitor, has to check up on the SPV, including that it is allowed to buy residential property.
One result of the increased rental cover requirements following the budget tax changes will be to automatically reduce the maximum LTV many landlords can obtain. Although comments from Mark Carney have made it clear the Financial Policy Committee (FPC) is keen to impose some restrictions on the BTL market the fact that lenders have understandably felt compelled to react to The Chancellor’s tax increases on BTL reduces the need for the FPC to act.
This will probably at least delay any action by the FPC to restrict BTL lending, especially as the short term impact of the 3% stamp duty surcharge, which will be imposed on relevant UK completions outside Scotland from 1 April next year, will distort both the BTL and owner occupier markets, but especially the former, for at least 6 months.
Because most BTL mortgages are not regulated the quality of data available to the FPC is significantly less robust than in the residential lending market and the distortion in sales resulting from the 3% stamp duty surcharge will add to the FPC’s difficulty in formulating policy.
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