Barclays enacts tougher mortgage approval process in stressed buy-to-let market
UK bank Barclays is imposing tougher affordability checks on applicants for buy-to-let mortgages, in an effort to show the government and the regulator that the necessary precautions are being taken in the market, which the Bank of England has said that it has concerns over. This comes in advance of the government introducing new measures to cut the amount of tax relief landlords can claim on their mortgage interest payments; the reduction of these benefits will begin in April 2017, with reports suggesting that this will push up landlords' bills substantially. 

Barclays is first to toughen buy-to-let tests with landlords forced to prove rent is 135% of mortgage payments

Barclays has rushed to impose stricter affordability checks on aspiring buy-to-let landlords ahead of the Chancellor’s tax squeeze.

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In a bid to put the brakes on the booming buy-to-let market, the Government will impose swingeing cuts on the amount of tax relief landlords can claim on their mortgage interest payments.

These benefits will be whittled away from April 2017 – dramatically pushing up landlords’ tax bills.

Barclays has become the first High Street lender to respond to fears that buy-to-let mortgages will soon become unaffordable for many people, particularly when interest rates finally rise.

To qualify for a new buy-to-let mortgage, its customers will have to prove their rental income covers at least 135 per cent of their monthly mortgage payments.

This is an increase from the current level of 125 per cent – which is fairly typical for mortgage lenders. The changes will come into force next Monday.

In a letter sent to mortgage brokers, Barclays said: ‘As a responsible lender, Barclays wants to ensure that our aspiring landlord customers can afford the increase in tax liability once these changes come into force.’

Barclays’ intervention comes as the Bank of England warned on Tuesday that buy-to-let borrowers ‘may be more vulnerable than owner occupiers to an unexpected rise in interest rates or a fall in income’.

If mortgage rates rose by three percentage points, it said almost six in ten buy-to-let borrowers would see their rental income not cover 125 per cent of their interest payments.

The Treasury is mulling whether to give the Bank’s Financial Policy Committee new powers to enforce tougher affordability checks.

Experts last night warned that other lenders are likely to follow Barclays’ example – putting the buy-to-let dream beyond reach for many people.

Andrew Montlake, director of Coreco Mortgage Brokers, said: ‘This is a big change from Barclays and could well spark a number of similar reviews from lenders who want to be seen to be taking into account the effect of forthcoming tax changes.’

He added: ‘With buy-to-let very much still in the crosshairs, it would be no surprise if further action is taken against what is now seen as an easy target.’

The Government and regulators are also worried that Britain’s growing army of landlords poses a threat to the economy and could exacerbate a housing crash.

The total owed on buy-to-let mortgages in the UK has soared from £65billion to £200billion over the last decade.

In his Autumn Statement last week, Chancellor George Osborne revealed a 3 per cent stamp duty surcharge will be imposed on new buy-to-let purchases from next April.

From April 2017 the Government will gradually reduce the amount of tax relief that higher rate taxpayers can enjoy.

Currently all property investors can deduct the full amount they pay in mortgage interest from their property’s rental income – and only pay income tax on the profit.

By 2020, 40 per cent and 45 per cent taxpayers will only receive basic rate 20 per cent relief on their entire mortgage interest bill, so the amount of tax they pay will rise dramatically.

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