The Prudential Regulation Authority, part of the Bank of England, tightened up its lending guidelines in 2017, meaning that some lenders wanted rents to cover at least 145% of the payments on a commercial mortgage for buy-to-let landlords.
However, ThisIsMoney.co.uk says that recently, some lenders have reduced this to requiring rents to equal 125% of the mortgage repayment. This percentage figure is known as the mortgage interest coverage ratio.
Some lenders have looked at rents covering 145% of the mortgage payments, even if the interest rates were to go up to 5.5%.
Many smaller lenders are targeting landlords who are on the 20% basic tax rate, by relaxing their lending criteria to the 125% mortgage interest ratio. Other lenders may reduce their mortgage interest coverage ratios from 145% but not necessarily to 125%.
When making lending decisions, lenders will take other factors into consideration other than the mortgage interest coverage ratio. They look at the landlord’s other income sources, their tax band and assets that could be used to cover the commercial mortgage in case of default.
As different lenders operate different lending criteria, it can be a complex process for a landlord to find the best deals. It can also be time consuming to approach lots of individual lenders for mortgage quotes. A commercial broker has the expertise to match a borrower’s needs to the best mortgage deal. The broker can usually come up with an initial loan application approval very quickly.