There has been a dramatic fall in the number of buy-to-let mortgages available following last April’s stamp duty increase and tougher affordability checks, new research shows.
According to comparison service Moneyfacts, the number of mortgages available has fallen 5% in the last month alone, the largest reduction in product numbers since March 2009.
The number of loans available fell from 1,482 in December to 1,408 in January, with lenders pulling back following the introduction of tougher affordability checks at the beginning of the month.
The Bank of England’s Prudential Regulation Authority introduced tougher underwriting standards and affordability assessments on 1 January to make sure borrowers can cover the cost of their mortgage in the event of an interest rate rise.
Lenders will be required to set a minimum borrower rate of 5.5% during the first five years of a buy-to-let mortgage contract when assessing affordability.
They will also have to take into account annual rent rises of 2% when assessing whether a landlord can afford a property.
Portfolio landlords with four or more rental properties will be subject to stricter checks on income and debt from September.
In the last year several lenders have increased the rental income a landlord must bring in relative to their mortgage costs.
While the standard interest coverage ratio was 125%, many lenders have now raised this to 135% or 145%, resulting in landlords having to increase rents or reduce their mortgages.
Charlotte Nelson, finance Expert at Moneyfacts, said: “With tougher affordability rules having come into play on 1 January and more changes due in September it is no wonder the buy-to-let market has taken a hit.”
The new rules reducing the amounts landlords are able to borrow has resulted in the 75% loan-to-value sector seeing the largest reduction in product numbers, falling from 606 to 540 in just one month.
Nelson said uncertainty and fewer products on the market could be a lethal cocktail for landlords in 2017.
“Alongside tougher affordability, major changes to the way in which income from property rentals is taxed will be coming in April. Lenders are perhaps withdrawing products to get back to just their ‘core’ range in an attempt to wait and see what other providers will be doing in the run up to April,” she said.
Mortgage interest relief for residential buy-to-let properties is set to be reduced to the base income tax rate, which is 20%.
It is due to be phased in over a four-year period starting from April 2017. Landlords are currently able to claim tax relief on the top rate of tax of up to 45%.
The changes mean landlords will no longer be able to deduct mortgage interest payments or any other finance-related costs from their turnover before declaring their taxable income.
Last April, the government introduced a 3% stamp duty increase on second homes to curb the buy-to-let market and free up property for first-time buyers. This has resulted in a slowdown in the market, with landlords pulling out due to higher costs.
According to the Council of Mortgage lenders, landlord borrowing in octovber was 21% down from the same last year in October at £3 billion.