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 in to force on March 16, 2016, although many mortgage lenders had operated the new measures for some time.
Buy to let landlords will find lenders 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.
Consumer landlords have to prove they can afford to pay the mortgage on a rental home if the property has no tenant.
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 or 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 home owners, 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 will have to 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.