New rules could make it difficult for landlords to switch loans
Landlords with a portfolio of properties could face becoming buy-to-let mortgage prisoners as new lending rules come into force, making it near impossible in some instances to switch to cheaper buy-to-let mortgage deals.
Any landlord with a portfolio of properties (four or more) are preparing to be faced with challenges after recent changes to mortgage rules set out last week by Labour leader Jeremy Corbyn who promised to re-introduce rent controls if elected.
With such new rules in place, it will make it far more difficult for landlords to finance their investments and demonstrate affordability.
The past couple of years has proven to be a difficult time for landlords. Who have been hit hard with tax rises, stamp duty, to name a few.
The proposed new lending requirements which are to be set out by regulators, mean that landlords who have a portfolio of four or more properties, will now face more rigorous affordability checks. Going forward, any landlords who seeks finance for a single property (from this month) will have their entire portfolio assessed and taken into account.
Best case scenario from this outcome, means that landlords will now a significant amount of paperwork to be approved for a buy-to-let mortgage. Worst case scenario, a number of landlords may be turned down and end up being stuck on expensive variable rates with their current lender which will make affordability a challenge.
Managing director at Shawbrook Commercial Mortgages. Karen Bennett, says: ‘We have seen some lenders exit this market altogether, with others focusing on those landlords with three properties or fewer.’
Santander as an example is restricting its lending to like-for-like remortgages for landlords with a portfolio of properties, which means landlords who are looking to add to their portfolio or raise capital from existing property will be automatically declined by the bank.
Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.
From April 2017, landlords are no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.
Landlords will be able to obtain relief as follows:
in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction
In simple terms this means that a higher rate taxpayer will have their monthly returns nearly wiped out if mortgage interest represents 75 per cent or more of rental income.
Landlords will also face hefty penalties for breaking any of the new regulations on tenancies. These include unlimited fines if they fail to license properties as required and also could face up to fines of £3K if they let to tenants without legal right to live within the UK.
The ‘right to rent’ regulations put the burden on landlords to check tenants’ immigration status.
Landlords in letting property in England and Wales may also face heavy fines from April 2018 as new rules on energy efficiency come into play. This is to ensure landlords meet guidelines that each property reaches a rating of ‘E’ on a scale of A to G, where A is the most energy efficient. Failure to comply could result in a fine of up to £5,000.
Despite the increasing downsides of buy-to-let, it still offers major advantages over other forms of investing. Landlords who are investing for the first time are currently taking advantage of low interest rates on loads and are profiting from strong house price inflation.
Not like stocks and shares, property can be purchased with a deposit and mortgage. Even if the FTSE 100 rises at the same rate as house prices, a buy-to-let landlord with a 20 per cent deposit will see five times the returns, as long as rental income covers the costs.
But unlike equities, buy-to-let is a rather hands-on investment. Landlords have to deal with both property maintenance and tenants’ issues.
Confidence in buy-to-let can be attributed in part to rising demand from tenants. Almost one in four households in Britain will be renting privately by the end of 2021, according to Knight Frank UK’s leading independent real estate consultancy “house prices and stagnant wages are putting home ownership out of the reach of many people.”
Matt Sanders, from GoCompare Mortgages, says: ‘Our research reveals that half of all tenants rent because they cannot afford to buy their own home. It now looks like many have given up all hope of ever owning a home. For some, changes to buy-to-let regulations are likely to make renting more costly. In turn, that makes saving for a mortgage even harder”.
If you are selling and need a Home Report carried out, why not drop us an email at email@example.com or call us on 0131 608 0175. We provide home reports across Scotland – including Edinburgh, Glasgow and Aberdeen – at a time that suits you.
Andrew MacKenzie is a qualified Chartered Surveyor with over 20 years’ experience within the Scottish Property market. He specialises in all types of residential valuations including Home Reports, Private Valuation reports and Development Appraisals.
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