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Navigating choppy waters

Thursday, January 19, 2017 11:24:00 AM


With all the developments within the Buy-to-Let marketplace, it's vital that you take advice.


Despite the many challenges, Buy-to-Let remains a sizeable part of the mortgage lending marketplace, and the rental sector is likely to continue to be fuelled by demand (such as, not enough homes being built and the issues renters face in pulling together the deposit required to get onto the property buying ladder).

The upshot of this is that landlords are seeing decent rental returns, and are benefiting from some of the excellent buy-to-let mortgage deals out there. (Source: Mortgage Brain, November 2016)

However, they will need to adapt and evolve as market and economic conditions change, and it's vital that landlords take professional advice. From us, as well as other professions, such as their accountant - particularly if they want to assess if opting for a Limited Company status may now be a better route going forward for their portfolio.

The key impacts
The government sees this sector as a decent revenue source, and the Bank of England feels that it needs to be controlled so that it's not so sizeable that it could have an adverse effect on the overall property sector. The latest initiative, in this respect, relates to the stricter affordability stress test rules, and this needs to be considered alongside other developments that have occurred in recent times, such as:

  • Tax changes - Higher tax burdens for buy-to-let landlords are being phased in from April 2017 - with the full impact being felt by 2020. Currently, landlords are able to offset their mortgage interest and other finance costs against the property income, thereby reducing their tax liability. Those on higher tax rates are able to receive relief at their marginal rates of 40% or 45%.

By 2020 the government's plan is to restrict relief to the basic rate of income tax (20%) for all individual landlords. Some basic rate taxpayers may also be hit, as the change might push them into the higher rate tax bracket.

  • Stamp Duty changes - purchases of buy-to-let properties (and second homes) now attract an additional 3% stamp duty above the current banded levels.

What it means
Of course, Brexit, and other economic impacts may ultimately influence current and planned regulatory controls. But, in the meantime, it's vital that both existing and potential landlords do their homework. For example, think about remortgaging onto a better deal, or look for the best possible deal if just starting up.

Stricter RULES for Buy-to-LET
From 1 January 2017, new stress tests and affordability checks will need to be in place, with the remainder of the new rules to be implemented by 30 September 2017.

What this means is that unless the initial mortgage rate is fixed for at least five years, lenders must take account of possible interest increases over a five-year period using a minimum stress test interest rate of 5.5% for new loans.

Alongside this, the Prudential Regulation Authority (PRA) has also stipulated a minimum interest coverage ratio of 125% - albeit it seems many lenders are already applying 145%.

Another rule is that from September 2017, Portfolio landlords (those that have four or more mortgaged properties, as defined by the PRA) must have a specialist underwriting approach applied, as lending to this group is viewed as being inherently more complex.

There is no guarantee that it will be possible to arrange continuous letting of the property, nor that the rental income will be sufficient to meet the costs of the mortgage.

The value of your Buy-to-Let property and income from it can go down as well as up. You may also require advice on the legal and tax issues.

The Financial Conduct Authority does not regulate legal and taxation advice, and most Buy-to-Let mortgages.

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


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



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