Property buyers with little in the way of a deposit are being shut out of the market as more lenders withdraw residential and buy-to-let mortgages with high loan-to-value ratios.
C&G and Lloyds TSB are the latest in a string of mortgage lenders to pull away from these loans. Lloyds TSB reduced its maximum loan-to-value to 95 per cent on Thursday and C&G to 90 per cent.
Lenders have been pulling the plug on these mortgages with little or no notice, often citing funding difficulties.
Earlier this week, Woolwich reduced its maximum loan-to-value on buy-to-let mortgages from 85 per cent to 75 per cent and increased its interest rates. Nationwide has started charging a premium for lending above 75 per cent, while Alliance & Leicester and Britannia have stopped providing 95 per cent loans.
“We have seen the higher risk 100 per cent-plus market wiped out in a number of days,” said Richard Morea, technical manager at London & Country Mortgages. “It has also affected those looking to borrow above 90 per cent.”
Any homebuyer with a deposit of 10 per cent or less should expect to pay a premium and could face a higher lending charge of thousands of pounds. The stricter lending criteria will make it much harder for first-time buyers to get on the housing ladder. Those with larger loans could also run into difficulties when they want to remortgage.
“Despite two rate cuts in December and February, the lending environment is getting tougher,” said Melanie Bien, director at Savills Private Finance. “The combination of the liquidity squeeze and the potential for falling house prices means lenders are concerned about high loan-to-values.”
Buy-to-let investors are facing similar hurdles to obtaining finance. Moneyfacts.co.uk estimated that a typical first-time landlord would need to invest an extra £5,500 of their own capital to purchase an average buy-to-let property than they would have done a year ago.
Morea said: “The abundance of 90 per cent [buy-to-let] deals available before the credit crunch has reduced to a trickle. Most landlords will have to find at least a 15 per cent deposit in order to proceed.”
Lenders are also imposing stricter rental requirements, for example by raising the amount by which the rent must cover mortgage payments. Landlords coming to the end of discounted rate periods are likely to face a sharp rise unless they can remortgage. The typical rate these mortgages revert to at the end of an initial deal is now around 7.25 per cent, according to John Charcol.
Figures released this week from the Council of Mortgage Lenders (CML) showed strong buy-to-let growth in 2007 as a result of continuing tenant demand. The CML expected this trend to continue this year, in spite of the funding constraints.
But Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, was more wary about the scope for the market to grow in 2008.
“The figures from the CML came as a surprise to many people,” he said. “I don’t think they reflect the full impact of the credit crunch. I suspect this growth rate cannot be sustained now that lenders have become more cautious about who they want to lend to.” He expects buy-to-let to flatten in the first half of this year.
The requirement for higher deposits on buy-to-let mortgages could affect the tax efficiency of property lettings. A key benefit of buy-to-let is the ability to offset mortgage interest against rental income for tax purposes. If landlords have to contribute more of their own capital, they may have less mortgage interest to set against rental income.
