There is little sign Britain's biggest buy-to-let lenders will tighten their mortgage rules for borrowers, despite the Treasury increasing landlords' tax bills and regulators at the Bank of England raising worries that the market may be overheating. One reason why is that interest rates are now so low, the only effective way lenders can compete is by keeping their lending criteria loose.
Barclays, one of the country's biggest buy-to-let lenders, was the first to tighten its lending criteria at the end of 2015 after Chancellor George Osborne had announced several tax hikes on buy-to-let investors and landlords, triggering speculation that other lenders would soon follow suit.
The bank increased what is called the "rental cover ratio" for buy-to-let applicants from 125%, standard for the industry, to 135%. It means applicants must be able to cover at least 135% of their monthly mortgage payments with rental income from the property. Or to put it more simply, the mortgage applied for must be small enough for the rent the landlord receives to cover it, with 35% of the rent to spare.
The interest rate assumed on these mortgage repayments is usually much higher than that attached to the loan, to test the borrower's ability to cope if rates rose sharply and suddenly. It is sometimes known as the "stress rate".
But none of the 11 major mortgage lenders approached by IBTimes UK said they have plans to raise their rental cover ratios or tighten the rules, though most said they keep their criteria under regular review and are awaiting the conclusion of a consultation on the industry by the Bank of England.
Falling buy-to-let mortgage sales have triggered a spate of cuts to interest rates as the market becomes more competitive and lenders battle for business. Equifax Touchstone, a financial data firm, said there was a 26.2% month-on-month drop in buy-to-let mortgage sales during March, equivalent to over £1bn ($1.4bn) fall.
With interest rates at historic lows, it may be that keeping their affordability criteria as loose as possible is the only impactful way lenders can compete against each other. "Some of them have been easing their criteria to get applications through," Martin Stewart, director of London Money, a financial adviser, told Mortgage Strategy.
"We've even seen some of them being more lenient on clients who have had some mild form of adverse credit, where previously they would have been an automatic decline. Lenders can't all offer the cheapest mortgage rates because there are so many of them, so they know they have to have reasonably priced rates and ease their criteria."
Landlords and buy-to-let investors have been on the receiving end of a series of tax increases by Osborne, who is targeting those with additional homes to raise revenue for his programmes to support first-time buyers and increase home ownership, such as Help To Buy.
Not only has he increased stamp duty by 3% for purchases of additional property not intended to be the buyer's main home, Osborne has also cut back tax relief for repairs and mortgage interest costs.
Now the Bank of England's Prudential Regulation Authority (PRA), a financial regulator, is exploring how it can tighten the rules for buy-to-let mortgage lending amid concerns about the market. Record-low interest rates are fuelling a risky lending boom that policymakers fear could become a credit bubble.
"As a responsible lender, we need to ensure our customers can afford their mortgage repayments," said a spokeswoman for HSBC. "Our current rental cover ratio is 125% of the mortgage repayments on an interest-only basis using a stress rate of 6%. We regularly review these calculations and there are no current proposed changes."
Lloyds and Halifax, both owned by Lloyds Banking Group, have a rental cover ratio based upon 125% at a notional rate of either 4.99% for loans less than 65% loan-to-value, or 5.49% for loans up to 75% loan-to-value, or the initial product pay rate if that is higher.
"To ensure we lend responsibly and comply with regulatory requirements, we regularly review our mortgage range and make changes in line with the market and our competitors," said a spokesman for Lloyds Banking Group. "There are a large number of changes facing the buy-to-let market and we will continue to monitor the impact of these closely."
TSB's minimum income coverage ratio is 125%. "We're currently reviewing our response to the PRA consultation paper on buy-to-let underwriting standards but no imminent changes are on the horizon," said a spokeswoman.
Virgin Money's rental cover is 125% of the mortgage interest calculated at a rate of 5.99% or the product pay rate, whichever is higher. "We have no immediate plans to change this, but do keep our policies under regular review," said a spokeswoman.
A spokesman for the Royal Bank of Scotland (RBS) Group, which owns the RBS and NatWest chains, said its stress rate is 5.5%. He did not give the current rental income ratio, though the RBS website notes that "lenders often insist that rent covers 125% of interest-only buy-to-let mortgages". The bank's affordability criteria is regularly reviewed to make sure it is complies with any regulatory requirements, he said, as well as its own risk appetite.
Jaedon Green, Leeds Building Society's director of products, said it has a 125% minimum rental cover ratio "and we have no plans at present to change this. However, the level of rental cover is only one component in a prudent assessment of affordability for buy-to-let mortgages."
A Nationwide spokeswoman said its rental cover ratio is also 125% and "we have no current plans to change this".
"Aldermore has always been, and remains, a prudent buy-to-let lender," said a spokeswoman for the bank. "Some time ago we tightened our affordability criteria, so we must see at least 150% interest cover. A strong focus on the viability of a loan balanced against any risks is a vital part of a prudent lending strategy.
"The consultation should bring consistency to the market and encourage best practice amongst lenders, to make sure the market functions at its best for consumers and to safeguard continued access to finance for the great majority of customers who are considering the impact of future changes."
John Heron, director of mortgages at Paragon, said his firm's criteria for single self-contained properties is a 125% income cover ratio at 5.35% and 130% at 7% for more complex property. "It is important to note this is a starting point only, in addition to this there is a future assessment of affordability undertaken which models the impact of market rates on affordability going forward and full validation of other personal income is also required," Heron said.
"Where we are dealing with a 'professional landlord,' we will undertake a review of the customer's full rental portfolio that will include: an assessment of the customer's business plan, their full portfolio of property, along with rental accounts and cashflows. It is clearly critical in this process to ensure a robust assessment of the sustainability of rental demand for the property in question."
Santander and The Coventry Building Society were also approached by IBTimes UK, but did not reply.