Lloyds's buy-to-let division pressures landlords to increase rents
11-16-2016
Lloyds's buy-to-let division pressures landlords to increase rents
Lloyds has become the first bank to restrict people's borrowing power depending on their tax band Credit: Holmes Garden Photos/Alamy Stock Photo
Olivia Rudgard
Britain's largest buy-to-let lender, a division of Lloyds, has become the first to restrict landlords' loans based on their likely tax bills - meaning higher-earning buy-to-let investors will come under pressure to raise rents.
Birmingham Midshires currently requires all borrowers to charge rents equal to at least 125pc of their monthly mortgage costs.
But it has said that higher-earning borrowers, who pay tax at the 40pc and 45pc levels, will be subject to tougher requirements.
Tax changes announced by George Osborne and being introduced next year will begin to remove landlords' ability to deduct their mortgage costs from their rental income before paying tax. Instead they will receive a 20pc tax credit.
This means that higher and additional-rate taxpayers will be affected more seriously by the change. Some could even find they make a loss of every month - on which tax is still required to be paid.
Some basic-rate taxpayers will also be pushed into the higher-rate bracket because of the extra income.
Previously 125pc had been the standard amount for lenders to require, but since the start of this year many banks have been increasing the required amount because of concerns over borrowers' ability to afford loans as the new taxes start to apply.
Some, such as Nationwide, have moved to require income of 145pc of the landlord's mortgage costs.
In September the Bank of England released a report telling lenders to take into account a landlord's wider costs, including tax when deciding how much they can borrow and whether they can secure a mortgage.
The Bank did not specify a required rental cover ratio in that report, but said that its requirements might lead to the industry standard of 125pc being increased.
Other lenders have indicated that they intend to treat all customers as higher-rate taxpayers, by increasing the rental cover requirement for everyone - a policy the Bank said was allowed.
Birmingham Midshires is the first to introduce a different system depending on a borrower's tax band.
Birmingham Midshires said that "for higher and top-rate customers, brokers will be able to obtain an rental cover ratio relative to the customer’s individual circumstances."
It has also increased its maximum age from 75 to 80 and has developed a rental income calculator showing the position for an individual borrower's circumstances.
It said the changes would be introduced "by the end of the year."
David Hollingworth, of London & Country, pointed out that that borrowers would have less clarity about why they were being offered a certain amount under this system.
"The downside is that you do have a less straightforward and transparent calculation by doing it this way, " he said.
Brokers also pointed out that the one variable within landlords' control was the amount of rent they charged.
There is already widespread evidence that rents are being increased ahead of the tax changes, and brokers warned that lending requirements, such as those being introduced by Birmingham Midshires, were likely to accelerate the trend.
Some lenders offer different terms for landlords within limited companies, who will not be affected by the tax change.
For example, Foundation restricts individual landlords to 145pc, while offering landlords in limited companies mortgages at 125pc.
olivia.rudgard@telegraph.co.uk