A Buy to Let mortgage is when a landlord – be them current or prospective – gets a mortgage to buy a property with the intention of letting out that property to tenants.
It’s a great way to get some extra income and expand your property portfolio. But things aren’t as simple as they were a few years ago and if you haven’t kept up with all the Buy to Let news, then you could be in for a few awkward surprises. The following guide is an update on Buy to Let mortgages, from legislation to market changes, as of November 2017.
Stamp Duty Tax
This is relatively old news now, but relevant nonetheless. In April 2016, a 3% surcharge was added to Buy to Let and second home purchases, with a threshold of £40,000. A majority of second homes fall outside of this threshold, so expect to factor Stamp Duty tax into your housing equations.
Mortgage interest tax relief changes
Until April 2017, landlords could deduct their mortgage interest costs from their income when calculating how much tax to pay. That’s now changed so that you can only offset 75% of your mortgage interest, and by 2020 that will be down to zero. On the plus side, landlords can claim a tax credit worth 20% of their mortgage interest. So how will this affect landlords?
Let’s say you have rental income of £20,000, and £18,000 of mortgage interest to pay. Previously, you would be able to use the interest amount to offset your taxable income. Since you would be earning £2,000 profit, that is the number you would be taxed on. At 20% income tax, you would take home £1,600. This has now been scrapped in favour of a scheme that’s harder on high earners. As of 2020, the new tax scheme will mean you pay tax on the whole £20,000 income – let’s say the tax is 20% for basic-rate tax, so £4,000 – minus 20% of the interest amount (20% of £18,000), which is £3600. The total tax you have to pay is still £400, with a take-home of £1,600. If you’re in a higher tax bracket that number would change. 40% income tax of £20,000 is £8,000, minus 20% of the interest amount, £3600. That means the tax is up to £4,400, a number that would have been £800 just last year. Before you decide on a Buy to Let mortgage, make sure you’ve done your calculations around expected costs and income so you’re prepared.
According to a forecast from Savills, house price growth will slow to just 1% next year. Because of this, combined with the above changes, they predict demand in Buy to Let mortgages will fall by over a quarter. This is obviously worrying news for anyone thinking about expanding or beginning their letting property portfolio, but it doesn’t necessarily make your investment a waste of time. House prices are still not expected to drop and will rise to 5% in 2020 for greater London. If your main purpose of investing in a property is to generate income from rent, then a Buy to Let mortgage will still have plenty of value. However, if you intend to sell the property for a large profit after gaining some equity on the property (paid for with the income from rent), then your returns might not be as profitable as you had hoped. The best way to know if it’s a good idea for your investment is to talk to an industry professional – it could end up saving you thousands of pounds.
Wear and tear allowance
Only a few years ago, landlords were able to deduct 10% off of their annual income from rent before calculating the tax just as long as they were renting out a furnished property. This was meant to cover the costs of wear and tear around the property and could be deducted whether or not any money was spent on furnishings that year. This has changed now to only allow landlords to deduct the cost of replacing or repairing furnishing or household items. Arguably fairer, but still something to know if you’re considering a new Buy to Let mortgage.
This may not apply to you, but it’s important you check your local borough. Some councils have begun a landlord licensing scheme, and any new landlords need to agree to property management rules or face fines if they fail to do so.
You will need a separate licence for each property and these can come to around £500 each. Some councils will allow you to reduce the costs if you are buying in bulk, but it’s still an expense to factor in. You can check your area here.
Letting agent fees and energy efficiency
Looking to the future, there is a plan in place to change the letting fee responsibility. At the moment, the tenant must pay the letting fees but the government announced plans in 2016 to move that responsibility to the landlord. If they go through with it, it is expected to come into effect in 2018.
In addition to letting fees next year, as of 1st April 2018, any properties rented out privately need to have an energy performance certificate, or an energy performance rating of E. This applies to any new tenancies after 1st April 2018, but also to all existing tenancies from 2020. The fines for noncompliance can be as much as £4000.
The Bank of England
The Bank of England (BoE) has helped make property investment very profitable in recent years with low interests rates encouraging affordable mortgages. But, as of November 2017, the interest base rate has risen from 0.25% to 0.50%. Worst affected will be anyone on a variable mortgage, but will also make mortgages more expensive in general.
The BoE is also introducing tough new requirements for buy-to-let borrowers, especially if you own many properties. If you own four or more properties, you must provide extra information including a full breakdown of income, debts, and potentially a Business Plan.
The nature of the mortgage and letting market is always evolving, especially as the government try to gain control. It is bound to be a turbulent few years, especially for landlords. For this reason, we strongly recommend talking to a professional who understands the industry. At Coreco, we have an in-depth understanding of the industry and can advise on the best course of action to to becoming a landlord or expanding your portfolio. Get in touch via our contact page to find out more.