Nationwide cracks down on buy-to-let mortgage lending as it sees landlords struggling with Osborne tax raid
01-01-2016
• The Mortgage Works cutting maximum LTV
• Nationwide's buy-to-let arm also increasing rental cover requirements
• Comes as BofE and Chancellor keep a closer eye on buy-to-let
By Lee Boyce for Thisismoney.co.uk
The property scene just got even gloomier for landlords today after the country's biggest building society announced a tightening up of lending criteria for those wanting to take out a buy-to-let mortgage.
Nationwide Building Society is cracking down on rental calculations and chopping at its maximum loan-to-value for landlords over worries about tax relief changes next year.
Nationwide's Mortgage Works – the mutual's buy-to-let arm – which provides one in seven loans to landlords, is increasing rental cover requirements from 125 per cent to 145 per cent and cutting its maximum LTV from 80 per cent to 75 per cent from 11 May.
Stormier weather? Nationwide's buy-to-let arm The Mortgage Works is making landlord lending criteria stricter
Nationwide says the move is in response to Chancellor George Osborne's tax crackdown next April which it believes could cause difficulties for landlords.
Thousands of buy-to-let landlords will see earnings hit as the amount they can claim as relief will be set at the basic rate of tax – currently 20 per cent.
Some current basic-rate taxpayers will also be hit, because the change will push them into the higher-rate tax bracket. It will be phased in over a four-year period from April 2017.
Currently, landlords can claim tax relief on monthly interest repayments at the top level of tax they pay of up to 45 per cent.
In the past few months, the three per cent stamp duty surcharge on buy-to-let properties has been well documented, however it appears Nationwide is far more concerned about the forthcoming tax relief changes.
The lender said: 'These changes have been implemented in response to the forthcoming changes to landlord tax relief, which will start to be phased in from April 2017.
'At present, mortgage interest is fully tax deductible, but from April 2020 tax relief on mortgage interest will be limited to 20 per cent. This means that higher tax rate payers will pay more tax as relief is reduced to the equivalent level of a basic rate tax payer.'
Paul Wootton, The Mortgage Works managing director, told Mortgage Strategy magazine: 'As a responsible lender, this change is a pro-active move that recognises the need to help safeguard rental cover for landlords over the coming years, and in advance of the forthcoming changes to mortgage interest tax relief.
'TMW, as part of Nationwide, already robustly assesses the affordability of its buy-to-let mortgages against stress rates that are considerably higher than the borrower's existing rate.
'The increase in the rental cover requirement is designed to strengthen this cashflow position even further, and help them withstand the impact of increased costs from the new tax regime.'
Close eye: The Chancellor and the Bank of England are keeping a closer eye on the buy-to-let market
Landlords who have high mortgage costs relative to rental income could even experience losses, because higher tax bills may exceed net incomes. According to Treasury forecasts, the tax relief changes will net it almost £1billion a year by 2021.
This move by Nationwide could trigger other big lenders to follow suit. The main players in buy-to-let mortgages are Lloyds Bank through Birmingham Midshires, Santander, Royal Bank of Scotland and Virgin Money.
In December, Barclays raised its rental cover requirements to 135 per cent.
Rental requirements are determined by the amount landlords pay on their mortgage. Lenders need to know that borrowers can afford their mortgage if interest rates rise.
They are doing this by applying so called ‘stress tests’ and are adjusting their calculations to factor in interest rates rising to as much as 5 or 6 per cent.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: 'Some lenders have already increased rental stress rates in response to tax relief changes but not to this extent.
'It is likely that other buy-to-let lenders will follow suit in a domino effect. It will make it much tougher for landlords to get the numbers to add up and careful consideration will need to be given before expanding portfolios or indeed investing for the first time.'
The move comes after the Bank of England started to warn about the buy-to-let dangers last year, which has seen a number of moves from the Chancellor to curb it.
It is concerned the surge in buy-to-let could lead to financial instability in the event of house price falls.
Roughly two million Britons are now private landlords collectively renting out five million properties, data from lender Paragon shows.
Nearly six per cent of households are receiving income from rented properties – a figure that has tripled since the 1980s, data from the Office for National Statistics shows earlier in the month.
According to the latest house price index from Nationwide, in April, the annual pace of property value growth slowed to 4.9 per cent, compared to 5.7 per cent the previous month. However, they still hit a record high of £202,436.
Elsewhere, the Land Registry says prices in England and Wales fell to £189,901 in March compared to £190,275 the previous month.