Hidden regulators are already influencing the buy to let mortgage market as the government and Bank of England work behind the scenes to grip how much landlords can borrow.
Chancellor George Osborne and Bank of England governor Mark Carney both have concerns that the booming buy to let market could undermine economic growth if property prices start to fall.
To allay these worries, Osborne has agreed to give the Bank extra powers to curb buy to let borrowing.
Although the Bank has yet to enact these powers, buy to let lenders have taken the hint and started to rein in buy to let borrowing by imposing tighter affordability requirements on borrowers.
To show how this is affecting buy to let borrowers, check out this table showing the rent cover demanded by different lenders for borrowing £187.5000 at 75% loan to value on a home to rent worth £250,000.
How rent cover impacts buy to let borrowing
| Lender | Rent cover | Rent cover interest rate | Rent required to cover mortgage |
|---|---|---|---|
| Santander | 125% | 5% | £976 |
| Barclays Bank | 135% | 5.79% | £1221 |
| BM Solutions | 125% | 4.99% | £974 |
| Foundation Home Loans | 125% | 5.25% | £1025 |
| Axis Bank | 125% | 4.09% | £798 |
The table shows that buy to let mortgage affordability depends on the rent cover interest rate offered by the lender – and that this can often differ from the headline mortgage rate.
For example, Foundation Home Loans offers landlords a 3.69% two-year fix, but the rent cover rate is 5.25%.
What is rent cover?
Rent cover is an affordability formula all buy to let lenders calculate when underwriting a loan.
The formula tests whether the rent generated by a property is enough to cover the landlord’s mortgage and running costs. The rent cover interest rate is typically higher than the mortgage rate to take interest rate increases into account.
Calculating rent cover
The formula works like this:
- Work out the buy to let mortgage amount x rent cover interest rate to give the annual interest due on the mortgage
- Multiply the annual interest due on the mortgage by the rent cover rate to give the annual interest due with rent cover applied
- Divide the annual rent cover interest due by 12 to give the monthly rent the property must generate to qualify for the borrowing
Example
From the table above, the Santander rent cover is calculated as:
- £187,500 x 5% = £9,375
- £9,375 x 125% = £11,718
- £11,718/12 = £976
