Lenders are warning that changes in mortgage underwriting rules are set to fundamentally change the buy to let market.

Enhanced underwriting criteria that has increased the rent cover calculation for landlords will impact on borrowing, warns trade body the Council of Mortgage Lenders.

Landlords will also have to shift their focus to cheaper homes offering higher yields to meet the new measures.

The CML expressed concern that many landlords seeking to refinance buy to let homes may become mortgage prisoners.

The analysis looks at cover ratios – the amount underwriters at banks and building societies calculate as enough income generated by a rental home to support borrowing.

Traditionally, the cover ratio was set at 125% the annual mortgage repayment worked out as an interest only payment at 4.5%.

Under new rules, the cover ratio has increased to 145%, which means a buy to let home has to have a higher yield to provide the income to support the same borrowing.

The CML found to pass the cover ratio rule across every local authority, the mortgage repayment rate for a two-bed investment property would have to be 2.45%, while 93% of such property nationwide qualifies for a 75% loan-to-value mortgage at 125% at a 4.5% interest rate.

However, says the CML, some lenders have moved to a 145%/5.5% cover ratio and some are looking at 155%.

When the higher cover ratio is applied only 20% of buy to let homes qualify for a 75% LTV mortgage.

“The net result is that investors will need to increase the equity needed to take out a BTL loan under a higher ICR and stressed rate, “said the CML.

“Some customers may find it harder to remortgage to another lender as their rents will not have risen high enough to cover the new borrowing, making remortgaging a challenge at high loan to values.”

Read the full report