Every Landlord Needs To Know How Recent Changes Affect Them
If you are a Buy to Let Landlord, then you are entitled to feel as if you have been hit from every angle by a litany of regulatory and tax changes over the past couple of years.
Changes in the tax treatment and mortgage affordability have been well documented, (though we have included a summary below), but what many landlords may not realise, especially if they have not taken a mortgage for a while, are the changes implemented by the Prudential Regulation Authority, (PRA) which will affect every landlord with 4 or more mortgaged properties looking to take out a mortgage.
This means you should be reviewing your options regularly.
Have no fear though, because Coreco have been at the forefront of discussing these changes with lenders and are well placed to assist landlords through the new mortgage regime.
We’ve also created a handy infographic so that you can quickly see everything you need to know – download here.
So, What Happened?
The Prudential Regulation Authority, (PRA) have been pretty explicit in the fact that they feel mortgage lenders should be underwriting portfolio landlords in a very different way to those with just a couple of properties.
They made a series of recommendations that lenders have now had to adopt. This includes: –
- Ensuring all lenders check landlords’ incomes properly
- Additional Stress Testing should take place to check affordability in event of interest rates rise
- Consideration should be given to the following costs where the borrower is responsible for payment: management and letting fees, council tax, service charge, insurance, repairs, voids, utilities, gas and electrical certificates, licence fee, ground rent and any other costs associated with renting out the property
- For portfolio landlords, defined as those with more than 4 mortgaged Buy to Let properties, (not including your main residence), lenders will be expected to assess the borrower’s experience in the market including their full portfolio of properties, assets and liabilities and the merits of any new lending in the context of the investor’s existing portfolio
So, what do the new underwriting rules mean for portfolio landlords?
Portfolio landlords have officially been defined as those who own 4 or more mortgaged properties, (not including your main residence).
Those applying for a mortgage may be in for a shock in terms of the amount of paperwork that lenders may now require to assess their application as it is no longer going to be a case of just assessing the security property itself.
A full summary of what lenders could ask for:
1. Details of personal or alternative sources of income and associated Tax Returns
This is a major point, specifically in providing lenders with full tax returns for the properties. Making sure you fully disclose and pay tax on the income derived from your property portfolio is a must and anyone who does not will find it difficult to borrow. Furthermore, lenders who spot inaccuracies will have a duty of care to question the landlord and potentially report this to HMRC.
It is therefore imperative that landlords get their tax affairs in order quickly and utilize advice from a properly qualified accountant and not just a part-time book keeper.
2. Detailed Portfolio summary
Landlords now have to provide a full spreadsheet of all their properties which will include more than the standard Property Value, Rent Received, Mortgage Amount and property address provided in the past. It should also include columns on costs associated with the property, for example service charges, ground rent, lettings agent’s costs, insurances etc.
Lenders will assess each portfolio on its merits to determine whether or not the current portfolio is breaking even and some may go further to spot check a property or two. They will need to be comfortable that adding to the portfolio is the right thing to do.
The issue here is that this has become a grey area that can differ substantially from lender to lender meaning a quick Agreement in Principle from a lender may be more difficult to achieve.
Some lenders for example may decline anyone who has an HMO or Student Let in their portfolio as it is not something they feel comfortable with, whilst others will be much more relaxed.
3. Asset/Liability Statement
4. Commentary on any perceived geographic concentration risk
5. Cash Flow Projection
6. Business Plan and commentary
How does this differ from the past?
Previously, most lenders mainly concentrated on the new property being offered as security rather than the performance of the portfolio in the background.
Some lenders did not require any evidence of income at all and could speed from application to offer very quickly indeed, without any concern of the properties in the background.
If you have not applied for a mortgage for a while, you may find the experience very different to what went previously and you will be glad to have a guide by your side to make the process as smooth as possible and avoid wasted time, too much paperwork and a few choice words!
What should portfolio landlords be doing now – if anything?
Landlords should be looking at their portfolios and getting their house in order right now.
The key first step is to take Independent Tax Advice from a professional tax adviser. This is not just to ensure that their accounts are all up to date and fully disclosed to the Revenue, but also to ascertain whether it may be preferable to borrow in a Limited Company name rather than in personal names.
For those with equity in their portfolio it makes a lot of sense to look at remortgaging whilst rates are low and pulling out equity to help speed up any future purchases.
As expected, lenders have interpreted these new rules very differently so it is even more important to speak to a professional advisor with experience in this market who can help them review their portfolio and their requirements going forward to ensure they are mortgage ready.
Coreco have brokers with over 20 years’ experience in this market place and will put together your own “Portfolio Landlord Pack” to ensure all our landlords can move forward with confidence.
Does this mean BTL Mortgage rates have risen?
Actually, the exact opposite has happened since these rules were announced as the low rate environment, coupled with lenders desire to still lend in a smaller Buy To let market has meant that competitive pressures have driven rates down to levels never seen in the Buy To let market. Hence the Buy to Let remortgage market is currently booming.
Our advice is to remortgage now for those that can, especially as the Bank of England generally seems to be constantly changing its tune on the future direction and timing of the next rate change.
What Else Has Already Happened?
A few years back, then Chancellor George Osborne, embarked on an almost personal crusade against the Buy to Let market as a way of trying to stop an overheating property market.
Backed by many including the Bank of England they saw a systemic risk in the fact that Buy to Let landlords not only allegedly took away properties from first time buyers, but also posed a threat to stability if all landlords suddenly flooded the market with properties to sell at once.
So he introduced the following changes:
- Landlords of furnished lets could claim a wear and tear allowance of 10% of their rental income. With effect from April 2016 this relief was restricted to expenditure actually incurred.
- Mortgage interest costs could be deducted against rental profits which effectively gives the landlord tax relief at their highest marginal rate of tax. From April 2017, this relief was reduced over 4 years to the basic rate of income tax (which is currently 20%).
- From April 2016 SDLT increased by 3% for landlords (and second home buyers)
- From 2019 Capital Gains Tax arising on the sale of a property (other than the main residence) will have to be paid within 30 days of completion. At the present time the Capital Gains Tax is paid between (approximately) 10 and 22 months after completion.
Due to the above, lenders have moved their Buy to Let mortgage rental calculations to cope with this.
Most lenders calculated the amount that could be borrowed based on the annual rental income having to at least equal the mortgage interest payments by 125% at an
assumed 5% rate. Now many have moved to 145% at an assumed rate of 5% or even 5.5%, although the variances on this are bewildering.
The exception to this rule is where the product is fixed for at least 5 years, or on a £ for £ remortgage, then some lenders will still work on the payrate of the fix which is much lower.
Many lenders will also now calculate the interest rate coverage required dependent on your individual tax bracket. In other words, higher and additional rate taxpayers will find they can borrow less than basic or nil rate taxpayers. Something to think about when deciding who should own a property.
In essence, this means that many landlords can now borrow less against each property, especially where yields are low.
Another aspect of the proposed tax changes is that this has given rise to a growth in the number of landlords now looking to purchase in a company name rather than their own personal names. Whilst it does not get around the additional 3% stamp duty there are other benefits, although it is important to obtain proper tax advice before proceeding in either direction.
Lenders themselves have seen this as a growth area and more and more are coming in to provide products for those purchasing in a corporate entity, with some lenders even making their Ltd Company rates available at the same rate as their rates for those buying in personal names.
This is all good news and means that there is now more choice available for landlords looking to purchase in this way.
So, what Interest Rates can I achieve now?
The good news of course is that interest rates available of Buy to Let products have never been so low. I mean, really low.
Lenders are falling over themselves to attract more business and remortgage products are available with free valuations and legals.
Lenders also now have a wide range of retention rates we have special access to.
As an example, landlords can now get a 2-year fixed at just 1.41%, (4.87% APRC) or a 5-year fix at 1.89%, (4.74% APRC). For those who want to keep their options open, there is a 2-year variable tracker rate at 1.94% (4.69% APRC) with no Early Repayment Charges.
With the current environment seemingly set to stay at low levels for a while, although the Bank of England are busy arguing about that, it seems that mortgage wise at least, it’s a good time for landlords to obtain mortgage finance.
For those with existing properties who see the current conditions as a buying opportunity, and there are many that do, now is an excellent time to look at restructuring your portfolio and release equity at these low rates.
Releasing equity now will enable you to have the cash to move quickly when looking at building up your portfolio.
What If I Need More Specialist Finance?
Looking to do more? We have an award-winning Commercial Team who can assist with:
- Property Development Finance
- Short-Term lending and Bridging Loans
- Commercial Mortgages
- Refurbishment Finance
In summary, whilst we have seen so many changes introduced and threatened, the Buy to Let market itself is going nowhere. If anything, it is maturing further and for those with the conviction and professional advice behind them, the future looks exceedingly bright.
To speak to one of our experience Buy-To-Let advisers please call us now on 020 7220 5110 or click here.
Watch Coreco Managing Director Andrew Montlake talk to Thisismoney.co.uk editor Simon Lambert about investing into Buy To Let on the Investing Show here.
There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.
Your property may be repossessed if you do not keep up repayments on your mortgage.