The past six months or so have seen some major political and economic changes in Britain and the world at large. How might a rapidly changing environment affect buy to let landlords? What lies in the year ahead?
Mortgage – availability
Following an announcement at the end of 2016, this year will see the introduction of stricter criteria on affordability and lending for buy to let mortgages.
The details of the changes are published in a January statement by the Bank of England’s Prudential Regulation Authority (PRA) on the lending activities of building societies. Essentially, the changes require mortgage lenders to adopt stricter tests of affordability on buy to let mortgages – effectively, the amount of profit a landlord is likely to make compared to the monthly mortgage repayments made.
This already has led to a reduction in the number of buy to let mortgages issued, says the finance magazine, The Week, which goes on to suggest that the new criteria set out by the PRA mean that rental income must be £140 to every £100 in monthly mortgage repayments (up from the previous £125).
Mortgage interest tax relief
From April of this year, one of the most significant new obstacles for many landlords is the loss of previously enjoyed mortgage relief on mortgage interest repayments.
Currently, those who pay only the basic rate of income tax may reclaim 20% of mortgage interest payments, but those paying the highest rate may reclaim 45%.
As from April 2017, owners of buy to let property are able to reclaim only 20% of mortgage interest payments, whatever the level of tax they pay – with the changes being phased in over 4 years with effect from this April.
Buy to let company investment
One of the major effects of the changes in the tax regime for landlords is the marked increase in the percentage of buy to let mortgages that are being taken up by limited companies, says the website Mortgages for Business.
According to the index maintained by this website, by the third quarter of 2016, 63% of all buy to let mortgage applications were made by limited companies – a figure that is significantly up from the 20% or so before the tax changes were announced. The figure includes companies buying new properties and “transfers”, where private landlords were selling a property they already owned to a company they had set up.
In terms of the value of buy to let mortgage applications made in the third quarter of 2016, the increase is less pronounced – representing 54% by value, compared to the 27% of the value of all buy to let mortgage applications before the tax changes were made.
There are tax advantages in a limited company owning buy to let property. The mortgage interest relief previously enjoyed by individual landlords continues to be available for companies and corporate tax is a fixed 20%, falling to 17% in coming years. Furthermore, companies are not subject to the strict new lending criteria and affordability tests introduced by the PRA – so, rental income may still be just 125% of the monthly mortgage repayments.
Increased participation by limited liability companies as well as private landlords may also reflect a growing shift towards commercial rather than residential property, as we reported last month.
Landlords and bridging finance
In response to the tougher rules on mortgage lending for buy to let property, more prospective landlords are turning to bridging loans as a way of financing purchases.
With the PRA’s new rules having come into effect only on the 1st of January, the next 12 months may be likely to see further increases in the use of bridging loans as an alternative form of finance for landlords.