LANDLORDS CAN NOW BORROW MORE – IF THEY LOCK IN FOR THE LONG TERM

One of the country’s biggest buy-to-let lenders has changed its rules to allow landlords to borrow substantially more if they’re willing to sign up to a fixed-rate deal for 10 years.

The Mortgage Works, part of Nationwide, has lowered the “stress rate” for customers taking out a decade-long, fixed-rate mortgage from 4.99pc to 4pc. It is the latest move from buy-to-let lenders aiming to arrest the slump in the landlord mortgage market.

For a basic-rate taxpayer earning £1,500 a month from their rental property, the new rules would increase the amount that can be borrowed from £285,577 to £360,000.

Higher-rate taxpayers would see their maximum loan size boosted from £248,773 to £310,344. The lender has different calculations depending on the tax band of a borrower.

Aaron Strutt of Trinity Financial, a mortgage broker, said: “This is an improved option for borrowers from one of the biggest buy-to-let lenders.” Banks have intensified the battle for existing landlords’ business in recent weeks, given few new people are investing in the sector. Data published by UK Finance, the industry pressure group, showed that while the number of buy-to-let remortgages increased by 5.4pc in the year to October, the number of new mortgages slumped 9pc.

Telegraph Money has previously reported how lenders have cut ratesand eased terms in an attempt to attract existing investors. Mr Strutt said the offer from The Mortgage Works would appeal to landlords who are planning to stay in the market for the long term, but he warned that there were drawbacks.

“If you lock into a 10-year fix you are limiting your ability to refinance the property, to swap to the cheapest deals or sell without paying an exit fee,” he said.

“The 10-year rates are more expensive than the cheapest two-year fixes, so landlords will pay for the privilege of the payment security.”
 

How does buy-to-let affordability work?

There are two components to a buy-to-let affordability test – the stress rate and the interest cover ratio (ICR). Banks want customers to prove that they can meet their monthly payments, even their interest rate was to rise in future, and that they have enough free cash to repair and maintain the property.

  The stress rate – or notional rate – assumes a higher interest rate than the one actually charged, say 5pc, to ensure that the borrower can withstand an increased interest rate in future.

The interest cover ratio looks at how much rent is generated compared to this stress rate. The ratio generally depends on whether the customer is a lower or higher rate taxpayer.

  For a £250,000 mortgage, a stress rate of 5pc means the property must generate at least £1,042 a month in rent to cope with any future rate rises.

The ICR, in this instance 145pc, means that the rent must be at least 145pc of this figure to meet maintenance costs, meaning a borrower would need a property generating £1,510 per month.