Accidental landlord:would-be-investors may write off London when new buy-to-let mortgage criteria comes into play

The accidental landlord says tough new criteria for granting buy-to-let mortgages could cause small investors to look outside the capital...

Click to follow

You had better hurry if you need to apply for a buy-to-let mortgage because it looks like it's going to get a lot harder for small investors to raise money for rental properties from early next year.

The Bank of England has said that from January 1, lenders must ensure that a landlord's rent will cover at least 125 per cent of their monthly mortgage payments, and that they must take into account the fact that from April next year many landlords will face higher tax bills.

As a result, brokers believe that many lenders will only hand out mortgages on properties where the rent will cover at least 145 per cent of the interest payments based on an assumed interest rate of 5.5 per cent, unless the borrower goes for a five-year fixed rate. If this happens, landlords buying a property with a 25 per cent deposit will need to have a rental yield of six per cent in order to qualify for a mortgage.

I know that doesn't sound particularly high, but rental yields on new purchases in London are typically no more than four or five per cent, so it looks like landlords without hefty deposits will really struggle to raise the finance.

Landlords looking to re-mortgage when their current mortgage deals expire might also fall foul of the new lending criteria, which could prevent them from switching to a new lender and a better deal.

I am planning to re-mortgage a property next summer when my two-year fixed rate of 2.99 per cent expires, to avoid automatically being switched to my lender's standard variable rate of 4.49 per cent. However, mortgage broker Martin Stewart of London Money tells me that my monthly rent is likely to fall £225 a month short of the £1,775 I would need to switch lenders. If so, I'll have to pray that my existing lender will offer me a better rate than its current standard variable rate, otherwise, like many landlords, I will be well and truly stuffed because my mortgage will rocket to £1,000 a month. That alone wouldn't be too bad, but as the Government has decided that from next April landlords won't be able to deduct their mortgage interest payments from their taxable income, I could well end up making an overall loss.

Martin tells me not to panic, and says he is sure lenders will offer existing customers new deals at the rates used to entice new borrowers. He's also confident some specialist lenders will be creative and come up with "alternative lending solutions", but this move has thrown up another barrier to buy-to-let. Martin reckons it will hit the London market hard as landlords will need deposits of at least 40 per cent. He says he and his mortgage broker colleagues have noticed investors are now looking "out in the sticks", such as Reading or Slough, or even "up North" where yields are more impressive.

Indeed, I've been spending my lunch breaks browsing websites for cheap properties on housing estates in the northern city where I grew up. The capital growth potential of these properties is rubbish — in fact, I spotted an almost identical flat to one I sold 15 years ago, in the same block, and the price had hardly moved.

However, rental yields in some of these northern cities beat London hands down. So if you are looking for a buy-to-let mortgage you'd better get a wiggle on and apply soon, or you might have to cast your net outside the capital.

Victoria Whitlock lets four properties in south London. To contact Victoria with your ideas and views, tweet @vicwhitlock 

Follow us on Twitter @HomesProperty, Facebook and Instagram