Buy to let investors could face paying an extra £10,000 to get a mortgage after a crackdown on dangerous debts by UK lenders.
Watchdog the Prudential Regulation Authority is concerned that some landlords are overstretching themselves and will face difficulties when interest rates rise and it is expected that the banks and building societies will start making new hefty charges from September 2016.
As a result, it is forcing lenders to run stricter tests to see whether an investor can afford the loan. Currently, investors have to prove they would earn enough from the rent to cover their repayments, but the new plan demands proof they would still be covered if rates rose by at least 2%.
Under the new tests, banks and building societies will want evidence of a yield of at least 5.2% to qualify for a 25% deposit loan. This would mean earning £7,800 a year from rent on a £150,000 home before paying the mortgage.
To pass the tests, investors will have to either raise rents to ensure they would be covered if interest rates soared, or reduce borrowing. However, according to Peter Armistead of Armistead Property, savvy investors can absorb these new charges by buying cheaper property with higher yields.
‘Clearly the investors most at risk are those with smaller deposits who buy property in parts of the UK where rents are low compared with house prices. This is a particular problem in places such as London and the South East where the average annual returns between 2010 and 2015, was just 4.86% in outer London and 4.71% in the City, according to LendInvest,’ he explained.
He pointed out that house prices in London are about five times what they are in parts of the North West, but salaries are only 30% higher. Manchester and Liverpool deliver some of the best rental yields, with Manchester recording average annual rental yields of 6.02% over five years, followed by Liverpool with 5.15% yields.
He also said that an average residential property in Manchester is just £155,000, while a flat in a good area, costs as little as £120,000. A property in Manchester can provide a 5% minimum cash rental yield and a typical 12% total cash yield, including 7% capital appreciation. Demand for rental accommodation is strong and by comparison with other regions, housing is cheaper.
‘Landlords will find the best returns in urban areas, with a concentration of students and young professionals. If investors can purchase cheaper properties with better yields, they will have the opportunity to protect and boost their profits in the longer term,’ added Armistead.