Tag : buy to let

Buy to Let Mortgage market changes

The UK’s Buy to Let market is in a state of flux, with an extra 3% Stamp Duty on the purchase of additional properties and changes to the way a landlord’s income is taxed.

Landlords used to be able to deduct all finance costs from their rental income, with net profits taxed at their marginal rate. Starting in April 2017 tax relief available for buy to let related finance costs will gradually reduce each year. Phased over 4 years it will finally be restricted in 2020/21 to a basic rate of tax, currently equivalent to 20%.

In September 2016, The Prudential Regulation Authority (PRA) – those responsible for the prudential regulation and supervision of around 1,700 banks, building societies, credit unions, insurers and major investment firms – announced expectations of firms’ underwriting standards to apply to the Buy to Let market.

What you need to know

The PRA changes mean that landlords:

• face tougher affordability assessments which take into account borrower’s costs including tax liabilities, verified personal income and possible future interest rate increases.
• must provide evidence that rental income covers their mortgage payments by a minimum of 145% at an interest rate of 5.5% for all products other than longer term (five years plus) fixed rates.
• with four or more properties, will have their whole portfolio assessed for affordability by the lender – even where other Buy to Let mortgages are held with different lenders.

With all of these changes many landlords may find their portfolios are less profitable.

Incorporation

According to research by the National Landlords Association (NLA), one in four landlords are considering setting up limited companies to negate the tax changes. If you hold a property in a company, your profits are liable for Corporation Tax at 20%, however, if you hold an investment property personally, your rental earnings are combined with your other earnings (such as income from your job) and taxed as Income Tax up to 45%.

At first glance a company structure could look more tax efficient, especially if you are a higher rate tax payer. But before you consider incorporation you should take into account the cost of commercial mortgages.

There’s no doubt the changes in the Buy to Let sector can cause some confusion but we can help find the most appropriate solution for you.

This information does not constitute tax advice. For more details on how this will affect your circumstance you should consult with an independent tax adviser.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

Some Buy to Let mortgages are not regulated by the Financial Conduct Authority.

Your property may be repossessed if you do not keep up repayments on your mortgage.

If you’d like to find out more about Buy to Let mortgages, please get in touch

What makes a good Buy to Let investment?

With property prices continuing to rise, Buy to Let can be an attractive way to invest. But whether buying your first Buy to Let property, or adding to your portfolio, it’s important to consider what’s involved.

Being a landlord
As well as the obvious duties of finding tenants and making sure they pay their rent on time, there are also a number of legal requirements that you need to meet as a landlord. For instance, you’ll need to use a deposit protection scheme, have the right Energy Performance Certificates and arrange annual safety checks and certificates for the utility supplies. You’ll also need to keep the property well maintained and respond to requests from your tenants if and when an issue arises.

Managing your finances
Then there’s the question of managing your commitment to the mortgage lender. Interest rates may be low now, but if you’re on a tracker mortgage and rates go up, could your income stand the rise? What if you have a gap in tenants and the rent dries up temporarily?

In the short term, landlords can still deduct mortgage interest from their rental income before calculating how much tax they should pay. However, from April, tax relief on Buy to Let mortgage interest will gradually be reduced. The restrictions will be phased in over four years, resulting in tax relief only being available at the basic rate of income tax (currently 20%) from April 2020. This could impact on any profit you’re expecting to make on your investment so it’s important to take it into account now.

Research before you buy
In terms of the property itself, have you thought about the location you’re buying in? Take the time to look around the area you’re considering. Is it up and coming or going down and out? If you’re looking to rent to a young family, do the local schools have a good reputation? Does it have good commuter links for young professionals? It may sound obvious, but it’s a good idea to put yourself in the shoes of your potential tenants and ask yourself what they would want. Their requirements may be quite different to yours.

Work out all the costs
Buy to Let lenders may require the rent you charge to cover up to 145% of the mortgage repayments, with many now requiring 25% deposits, or even larger. Once you know your mortgage rate and the monthly rent you’re going to charge, you should also factor in maintenance costs.

And with stamp duty 3% higher than on a residential property, make sure you cover all the costs involved in buying your investment property – especially in view of the diminishing tax relief.

Protect your investment
It’s important to protect your property, its contents, and your ability to keep up with your mortgage repayments should the unexpected happen and there are a range of different insurance products designed to meet these requirements:

• Buildings insurance
• Contents insurance
• Landlord’s insurance
• Life insurance
• Mortgage payment protection insurance (MPPI)
• Critical illness insurance
• Income protection

Which product is right for you will depend on your individual circumstances, so it’s important to get professional advice as part of the process.

If you’d like to find out more about Buy to Let mortgages, please get in touch