Is this a buy-to-let loophole? New mortgage means landlords can qualify with less rent WITHOUT locking in for a full five years
Landlords struggling to make the maths work on a new mortgage are being offered the chance to qualify for the easier rules a five-year fixed rate delivers – but without locking in for that full period.
Strict rules limiting the amount landlords could borrow on a buy-to-let mortgage came in almost two years ago, but now one lender has come up with a product that eases the amount of rent a landlord must earn without locking them in for five years.
Since 2017 landlords have had to choose between committing to a fixed term mortgage deal for at least five years or facing stringent affordability rules which limit how much they can borrow in relation to their rental income.
The new stricter affordability rules only apply to fixed rate terms of less than five years
But a new five-year fix from lender Foundation Home Loans allows borrowers to leave after three years without facing any early repayment charges – effectively giving them the flexibility of a three-year fix without the tougher affordability rules.
The deal comes in two forms, up to 65 per cent loan-to-value at 3.30 per cent and up to 75 per cent loan-to-value at 3.55 per cent – both quite expensive compared to existing deals on the market.
So who might this deal be right for, and is it worth the extra cost?
Why will this allow landlords to borrow more?
Five-year fixes have become one of the go-to mortgage types for landlords in recent years as less stringent affordability tests on these deals mean borrowers can take out larger loans.
A lender assesses whether a potential borrower is suitable for a loan by putting them through what is called a ‘stress test’.
As part of this the borrower has to be able to rent out the property for a minimum amount, which is proportionate to the size of the loan taken.
The rules, brought in by the Bank of England two years ago, force lenders to require more rental income cover than they did previously to qualify for a mortgage.