Every Landlord Needs To Know Further Changes Are Coming
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 few months.
Changes in the tax treatment and mortgage affordability have been well documented, (though we have included a summary below), but what many landlords do not realise are the latest changes coming into play from October this year 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 now.
Have no fear though, because Coreco are at the forefront of discussing these changes with lenders and will be well placed to assist landlords through the new mortgage regime.
If you’d prefer a quick summary, check out our infographic here: Coreco’s Landlord Guide
What Is Happening?
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 have made a series of recommendations that lenders must adopt by 30th September this year. 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 after October may be in for a shock in terms of the amount of paperwork that lenders are going to 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 will ask for:
- 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.
- Detailed Portfolio summary
Landlords are going to 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 now. 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 becomes a very grey area that will differ substantially from lender to lender meaning a quick Agreement in Principle from a lender will be a thing of the past.
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.
- Asset/Liability Statement
- Commentary on any perceived geographic concentration risk
- Cash Flow Projection
- Business Plan and commentary
How does this differ from the current situation?
At present, most lenders mainly concentrate on the new property being offered as security rather than the performance of the portfolio in the background.
Some lenders also do not require any evidence of income at all and can speed from application to offer very quickly indeed.
What should portfolio landlords be doing about it – if anything?
Landlords should be looking at their portfolios and getting their house in order right now. Making sure they instruct an accountant to help advise them on the best way forward and making sure their accounts are all up to date and fully disclosed to the Revenue.
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.
Lenders will all no doubt interpret these new rules very differently so it will be 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 be putting together our own “Portfolio Landlord Pack” to ensure all our landlords can move forward with confidence.
Does this also mean BTL Mortgage rates will rise?
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.
Once these changes come in to play however, the additional cost in terms of time and training for lenders may well see these rates rise a touch, although competition in this market should stay strong.
Our advice is to remortgage now for those that can, especially as the Bank of England generally seems to be changing its tune on the future direction and timing of the next rate change.
What Has Already Happened?
A few months 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 already been moving their Buy to Let mortgage rental calculations to cope with this.
Most lenders calculated the amount that can 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%.
In essence, this means that landlords can now borrow less against each property, especially where yields are low.
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.
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. You can now get a 2-year fixed at just 1.34%, (4.68% APRC) or a 5-year fix at 2.19%, (4.32% APRC). For those who want to keep their options open, there is a variable rate at just 1.89% (1.95% APRC) with no Early Repayment Charges which is remarkable.
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 get finance before the rest of these changes come into play.
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 before all the new changes come in to play.
Releasing equity now will enable you to have the cash to move quickly when looking at building up your portfolio.
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.
Watch Coreco Director Andrew Montlake talk to Thisismoney.co.uk editor Simon Lambert about investing into Buy To Let on the Investing Show here.
To speak to one of our experience Buy-To-Let advisers please call us now on 020 7220 5110 or click 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.
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A typical fee is £495.