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How Can We Free the ‘Mortgage Prisoners’?

Published: 25 April 2017

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Author: Carl Shave - CEO and co-founder
Last updated: 14Jul2024

Buy-to-let landlords have been dubbed ‘mortgage prisoners’ due to the inability to remortgage onto more competitive interest rates. While other homeowners are enjoying record-low mortgage rates, buy-to-let landlords are being targeted by stricter affordability testing and the removal of mortgage interest tax relief. The result is generating higher interest charges and thus more expense for landlords than there have been in previous years. The result of the assault by the taxman and the Bank of England is that many of the UK’s two million landlords are stuck on uncompetitive rates. The mortgage restrictions, in particular, are very bad for landlords and pose a major threat to the profitability of buy-to-let investments in the future. With landlord mortgages now tougher to secure, buy-to-let landlords could find themselves stuck on less competitive rates indefinitely.

What has changed?

Last week, buy-to-let investors became unable to offset all their mortgage interest against their rental income. These changes, due to be phased in and fully implemented over the next three years, will eventually mean that none of the interest will be tax-deductible. This means many landlords will pay more tax and in some cases could even pay tax on nonexistent profits. It is also important not to forget the introduction of the 3 percent stamp duty surcharge payable on buy-to-let purchases that was introduced in April 2016. The impact of these two changes alone means that landlords who pay tax at the higher rate may need rental income to rise by around 25 percent to achieve the same level of return. Then there are the stricter affordability tests introduced by the Bank of England’s Prudential Regulation Authority. The result is that the standard interest coverage ratio has now been raised by many lenders from 125 percent to 135 percent or even 145 percent. Lenders are also required to set a minimum borrower rate of 5.5 percent during the first five years of a buy-to-let mortgage contract when assessing affordability. Lenders may also factor in annual rent rises of 2 percent when assessing whether a landlord can afford a property.

What can landlords do?

Thankfully, there are some buy-to-let mortgage products out there specifically aimed at these ‘mortgage prisoners’ that still assess rental income at 125 percent of the mortgage pay rate or will look to utilise other income to meet any rental shortfalls. At Just Mortgage Brokers, we can help you find these deals. Landlords also need to plan and prepare for the changes. Costs are one thing landlords still have some control over. Landlords with smaller portfolios may be able to reduce the mortgage amount or raise rents to make mortgages more affordable. Some landlords are also choosing to transfer their existing properties or buy new properties through a limited company in order to dodge the tax changes. However, they must be aware of the potential extra costs and complexities involved in operating through a limited company before they do. For more information about how you can get the best rates on a buy-to-let mortgage or a limited company buy-to-let mortgage, please get in touch with the specialist advisers at Just Mortgage Brokers today.