Rents to go Radio Rental!

I live in the West End of Glasgow and one of my abiding memories of growing up is the Radio Rentals shop on Byres Road. Now for those of you who were born in the 1980s, I had better explain the concept behind Radio Rentals. Back in the day there were many of our parents who thought that it would be a good idea to rent our TVs and video players and there were many high street outlets who catered for this. You would pay on a weekly basis for this and I do not think that you would ever own the product. How they managed to keep that business model going for so long still remains one of life's great mysteries.

Renting property not TVs is now the thing and there is not a week that goes by without the landlord taking another kicking. This week's rabbit punch comes by way of a press release from the Mortgage Works (TMW), one of the largest funders in the Buy to Let (BTL) space. They have announced that they are going to make it more difficult to get a mortgage to fund a (BTL) purchase. Let me explain.

Firstly they are removing their 80% loan to value mortgage. Their maximum lend will now be 75%. In essence, this means that the landlord will have to find an extra 5% deposit before TMW will lend. Secondly they are increasing the tariff for the amount by which the rental needs to cover the mortgage from 125% to 145%.

The net effect can be explained in this example. If you are buying a BTL property at £100K you now need to find an additional 5% deposit - so that is £5K straight away. Then you have to make sure that the rental coverage is now at least 145% higher than the interest only mortgage payment rather than the previous £125%.

My expectation is that this will lead to fewer landlords entering the market but ultimately higher rents for tenants. Landlords face an enormous cut in their income from the removal of the tax breaks that are coming into force and now with the lenders diving for cover because they fear a raft of unpaid mortgages they have decided to do what lenders always do - bring up the drawbridge effectively withdraw from the market and wait to see what happens leaving the landlord sector in turmoil. The result is that the landlords will need to increase income to pay for this so you can expect increases in rent.

The government keep harking on about wanting to protect the vulnerable. Some may argue that what they have done in introducing these tax changes will ultimately have an adverse effect on those that they are trying to protect in the shape of increased rent.

The bottom line is that moving forward it is going to become an increasingly tougher gig to make it work in the BTL space.

#Does The Mortgage Work?