There is little sign Britain’s biggest buy-to-let lenders will tighten their mortgage rules for borrowers, despite the Treasury increasing landlords’ tax bills. One reason why is that interest rates are now so low, the only effective way lenders can compete is by keeping their lending criteria loose.
The bank increased what is called the “rental cover ratio” for buy-to-let applicants from 125%, standard for the industry, to 135%. It means applicants must be able to cover at least 135% of their monthly mortgage payments with rental income from the property. In other words, the mortgage applied for must be small enough for the rent the landlord receives to cover it, with 35% of the rent to spare. The interest rate assumed on these mortgage repayments is usually much higher than that attached to the loan, to test the borrower’s ability to cope if rates rose sharply and suddenly. It is sometimes known as the “stress rate”. It remains to be seen whether the Treasury moves will cool the market.