There have been so many changes in the Buy to Let sector, that I thought it was time for a general round up.
If you are a professional Landlord, an accidental Landlord or simply thinking of buying one property to rent out to help fund your retirement, read on, as you will be affected!
Tax Changes
Since April this year, we have seen the new tax changes regarding mortgage interest phased in. From 2020 landlords will only be able to claim tax credit at the basic rate of 20%, regardless of whether or not they are high rate taxpayers. This will result in many landlords paying high rate tax on their rental income for the first time.
Ltd Company Buy to Lets
The tax changes have prompted some Landlords to house their Buy to Let properties into a Limited Company. At present the rules allow a Specialist Purpose Vehicle (SPV) to be set up specifically for this purpose. The difference is simply that Ltd company tax rules then apply which in a nutshell means corporation tax (currently 19%) is paid on profit!
Depending on your tax position, this may or may not be advantageous to you and we suggest any existing landlords or anyone thinking about buying a property to rent out takes advice from their Tax Adviser or Accountant.
Read our blog: Why are landlords setting up a limited company to purchase buy to lets?
Stamp Duty
Since April 2016, Buy to Let investors have been subject to a 3% stamp duty surcharge. This was a strategic move by the Government to discourage first time sellers from hanging on to property at the lower end of the market when they moved up the ladder. It’s a big expense for Landlords purchasing property.
Read our blog: What are the new restrictions being imposed on buy to let mortgages?
Portfolio Landlords
The Prudential Regulatory Authority (PRA), have instigated tougher underwriting standards for Portfolio Landlords with effect from 30 September this year. Although different lenders have different definitions of who is a “Portfolio Landlord,” the rule of thumb is a private individual with 4 or more buy to let properties.
Lenders are now asking for minimum incomes for Portfolio Landlords and are unlikely to underwrite portfolios where the total loans exceed 75% of the total property value. They will be looking for applicants to provide documented evidence of income and expenditure, similar to the rules for residential lending.
Stress Tests
For a long time, as well as restricting the percentage you can borrow on a Buy to Let mortgage, (around 75% is the maximum) lenders have also imposed a “Stress test.” This means that the amount you receive in rent must exceed the mortgage interest payment by around 145%, assuming the interest rate is around 5.5%.
This is very restrictive in areas where property prices are high and rents have not caught up, often buyers can only borrow around 60% based on those rules.
Lately, lenders have started to be more innovative by offering more generous stress tests to landlords re-mortgaging on a “like for like” basis, basic rate tax payers and also for those borrowers willing to take a 5 year fixed rate. Some of the banks have moved away from stress tests entirely and now assess buy to let applications based on affordability only. In some cases this makes lending more generous, and of course with some applications lending amounts are reduced or even declined.
Read our blog: What is a Buy to Let Stress Test and Why do Mortgage Companies Use Them?
Area
Recently we have seen a shift in the areas investors are buying in. Rental yields are much higher in areas where property prices are lower.
Popular areas we are arranging buy to let mortgages for clients are currently mid Wales, the northeast and the North West.
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