New Buy To Let Mortgage Rules For Consumer Landlords
Buy-to-let landlords may not have noticed, but the new European Mortgage Credit Directive is now in force with stricter affordability rules for purchasing homes to rent out.
The directive came into force on March 16, 2016, although many mortgage lenders had operated the new measures for some time.
Buy-to-let landlords will find lenders to treat them harsher if they are first-time borrowers or just starting a property investment business.
The new rules call for a split between consumer and commercial landlords.
If the property has no tenant, consumer landlords must prove they can afford to pay the mortgage on a rental home.
A consumer landlord is defined as:
- A first-time buy to let borrower
- Someone who has already bought or inherited a home to rent out and neither the owner nor a relative has lived there.
To qualify for a buy-to-let mortgage, the renting must be short-term, the borrower cannot have any other buy-to-let properties, and the transaction must be for remortgage only.
- A landlord with a single buy-to-let rented out under a tenancy agreement
Consumer landlords will have similar rights to homeowners, including access to the Financial Ombudsman and more reasonable treatment if they fall into arrears.
Commercial landlords are buy to let investors who own several rented-out homes. They also have no consumer rights as the transaction is for business purposes.
Lenders will stress test lending differently for each type of borrower.
Consumer landlords must show they can cover mortgage costs from income or savings, while commercial landlords continue with the rent cover test.
This test demands a multiple of the rent covers the mortgage payment at the lender’s standard variable interest rate – typically 125% of the rent at a 5% interest rate.
Many lenders have adjusted their rent cover tests to make them stricter for borrowers over the past few months.
The government reckons around 11% of buy-to-let borrowing is affected by the rule changes.
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Investing in a private rented property can be achieved in a variety of ways. Sometimes landlords inherit a property that they then turn over to renting. Sometimes owners of properties become unintentional landlords because they are unable or unwilling to sell a property at the value the market currently dictates.