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Stamp Duty holiday and falling mortgage costs provide timely buy-to-let boost

After years of cracking down on landlords, the chancellor’s Stamp Duty holiday is a shot in the arm for the industry.

It’s not been an easy few years for the nation’s landlords.

A succession of decisions by the Government has chipped away at just how attractive it is for people to invest in property, particularly if they want to do so on a small scale and have maybe one or two buy-to-lets in a portfolio.

But a couple of recent changes may have made the prospect far more enticing.

Say goodbye to Stamp Duty (for now)

It was no great surprise when the Chancellor stood up in the House of Commons to announce a Stamp Duty holiday.

The nil rate threshold is temporarily being hiked from £125,000 to £500,000, meaning that nine out of every 10 buyers in England and Northern Ireland won’t have to pay any.

The surprise came in the revelation that this is being applied to landlords as well as those buying a property they intend to live in themselves.

Just a few years ago a higher rate of Stamp Duty was introduced for those buying a second home, in a bid to make buy-to-let less appealing (or more profitable for the Government, depending on your point of view).

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While this 3% surcharge still applies ‒ landlords can’t avoid Stamp Duty entirely ‒ it does mean they will enjoy smaller Stamp Duty bills as a result.

For example, before the changes, if I wanted to buy a £250,000 investment property I would pay 3% on the first £125,000 and then 5% on the remainder, meaning a total tax bill of £10,000.

That tax bill will now drop to £7,500, a tidy saving, especially if you’re looking to buy more than one investment property.

Falling mortgage costs

Another significant source of optimism for all would-be property investors has been the shifting state of the buy-to-let mortgage market.

Perhaps unsurprisingly, the number of buy-to-let mortgages on offer has dropped significantly as a result of the Covid-19 crisis.

According to data from financial information site Moneyfacts, the number of buy-to-let deals stood at 2,897 in March, but had crashed to just 1,455 in May.

The reopening of the housing market has led to a rise in the number of products on the market though, with product numbers jumping to 1,738 in July.

Still a long way down on the pre-pandemic, but a clear move in a more positive direction.

It’s not just the numbers of products that are likely to give landlords hope though, but the rates being charged on them too.

Moneyfacts data shows the average rate on two-year fixed rate buy-to-let deals in March stood at 2.77%, while on five-year deals it was 3.24%.

By July, this had fallen to 2.61% and 2.97% respectively.

Part of this will be down to the fact that lenders are far warier about lending at higher loan-to-values currently.

But equally, now that the market is moving again, lenders will want what business there is. And that competition will likely feed into some decent deals for landlords.

Jenny don’t be hasty

That said, there’s no doubt that moving into buy-to-let at the moment could be a nervy move.

Yes, there remains healthy demand for rental properties ‒ the shortage of housing hasn’t disappeared, and while people will struggle to purchase their own home, they will have to rely on rental properties.

But taking on any tenant is a big gamble at the moment. With significant unemployment seemingly on the way, how confident can you truly be that they will be able to maintain their rental payments?

There’s only so much due diligence you can do on a tenant ‒ you can’t really have a chat with their boss to find out what the chances of them getting the boot in the next year are.

Fortune favours the brave

Landlords are often painted as the pantomime villains of the housing market, a little unfairly in my view.

But the truth is that the Stamp Duty holiday is a real boon for investors, who could also benefit from lender competition and enjoy cheaper funding when purchasing their next buy-to-let property.

The big test will be just how robustly they run the rule over prospective tenants, to ensure they don’t end up with costly void periods. It doesn’t matter how much you saved on your Stamp Duty bill or mortgage, if you end up with an empty rental property.

By John Fitzsimons

Source: Love Money

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Limited company structure becoming standard for all BTL

Purchasing a buy-to-let property through a limited company is now the preferred route for all landlords regardless of portfolio size or type of property, research has shown.

The data, published by Foundation Home Loans yesterday (November 6), showed 62 per cent of landlords with one to 10 properties would purchase via a limited company, almost equal to the 65 per cent of those with 11 or more properties who said the same thing.

Previously landlords with larger portfolios were more likely to purchase properties through a limited company while those with smaller properties typically took out a buy-to-let mortgage in their individual name.

I think it will be the standard way the majority of landlords buy a property in the near future as the knowledge that limited companies are the most tax efficient way is filtering down and will soon become common knowledge

Nick Morrey

Overall almost two thirds (64 per cent) of the 888 landlords polled in September planned to make their next purchase within a limited company vehicle — up from 55 per cent of those asked in June.

The buy-to-let market grew rapidly after the financial crisis but has since taken a beating as a number of tax and regulatory changes have hit landlords’ pockets.

How the rules changed:
An additional 3 per cent stamp duty surcharge, introduced in April 2016, was closely followed by the abolition of mortgage interest tax relief for landlords.

Landlords then took a further hit when a shake up of rules by the Prudential Regulation Authority meant buy-to-let borrowers were now subject to more stringent affordability testing.

The changes to mortgage relief have been phased into the system since April 2017, but by April 2020 landlords will be unable to deduct any of their mortgage expenses from taxable rental income.

Instead, they will receive a tax-credit based on 20 per cent (the current basic tax rate) of their mortgage interest payments.

Following the changes, landlords who were higher or additional-rate taxpayers would now only get refunds at the 20 per cent rate, rather than top rate of paid tax.

On top of this, landlords could also be forced into a higher tax bracket because they would need to declare the income that was used to pay the mortgage on their tax return.

Based on a property yielding £950 in rent and a £600 mortgage per month, the landlord’s income could drop by 57 per cent after the rule changes, from £2,520 to £1,080, as shown in the table:

Tax yearProportion of rental income falling under previous systemProportion of rental income falling under new systemTax billPost-tax and mortgage rental income
Prior to April 2017100%0%£1,680£2,520
2017-1875%25%£2,040£2,160
2018-1950%50%£2,400£1,800
2019-2025%75%£2,760£1,440
From April 20200%100%£3,120£1,080

Due to the tax shake up, limited company status is more attractive to landlords as changes would not affect them and they can offset mortgage interest against profits which are subject to corporation tax instead of income tax rates, which is cheaper.

Interest coverage ratios on limited company applications are also lower than for most individual landlord applications.

Nick Morrey, product technical manager at John Charcol, said the research was “very much” in line with what he saw in the mortgage market at the moment.

He put the latest surge in limited company popularity down to the fact more buyers and advisers were aware of the benefits and that from April this year only 25 per cent of interest qualified for tax credit.

He added: “I think it will be the standard way the majority of landlords buy a property in the near future. The knowledge that limited companies are the most tax efficient way is filtering down and will soon become common knowledge.”

By April 2020, no mortgage interest will qualify for tax credits on the old system.

Jeff Knight, director of marketing at Foundation Home Loans, said: “The rise in limited company usage by landlords shows no sign of tailing off, particularly as we have a more professional landlord community who recognise the benefits of using such a vehicle.

“It’s therefore perhaps no surprise to see a growing number of landlords signalling their intention to make their next purchase through a limited company.”

With a general election set for December 12, the housing market and buy-to-let in particular is likely to be a topic during the campaign.

Last month advisers urged the potential future government to tackle the fact successive pieces of regulation had made it harder for landlords to operate economically.

By Imogen Tew

Source: FT Adviser

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Investing in properties for retirement is no longer sustainable

Nearly one million private landlords face a pension black hole after new laws and regulations mean the income from their properties won’t sustain them in retirement, MakeUrMove has found.

Some 43% of private landlords invested in a property to provide for themselves in their retirement, with many actively encouraged to do so as a safe, secure retirement option.

However three quarters of those landlords said they will consider selling their properties if they start to make too small a margin, or fall into the red due to additional costs.

Alexandra Morris, managing director of MakeUrMove, said: “Smaller, casual landlords have been impacted by rising costs of managing their properties, with 38 percent citing the high cost of repairs as one of their biggest concerns.

“The problem impacts landlords with a buy-to-let mortgage the most severely, as these additional overheads, combined with recent changes to the private rental sector, mean smaller landlords hoping for a steady income in retirement are now worrying that their properties won’t even cover their own costs.”

A surge in supply of properties on the housing market could mean these landlords struggle to sell, leaving them unable to cash in their pension investment or being forced to sell for less than anticipated.

The problem disproportionally affects older landlords, who have little time to make changes before they need to rely on their properties for a retirement income, with those over 55 most concerned about making too small a profit on their properties.

Investing in property as a pension plan is more prolific in the over 35’s, with 47% of this age group admitting to doing so, compared to just 24% of their younger counterparts.

Eileen Cooper, a landlord with two properties, has felt the impact of changes first hand. As a self-employed, part-time landlord, Cooper was relying on the rental properties to provide an income later in life.

She said: “We planned to buy another property once the mortgages on our current rental properties are paid off, however we have now decided against this due to the new laws and regulations brought in by the government, along with the ongoing changes to the tax system, which make it much less viable as a long-term investment.

“Due to changes in laws and regulation, the time required to manage the properties isn’t worth it.”

Source: Mortgage Introducer

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Landlords in remortgage surge

Intermediaries reported that 52% of buy-to-let mortgage cases in Q1 2018 were for landlords seeking to remortgage.

This was up sharply from 29% in Q1 2015 prior to the Summer Budget in the same year when wide-ranging tax changes were announced, including the gradual removal of tax relief on buy-to-let mortgage interest.

John Heron, managing director of mortgages at Paragon, said: “There’s a wide range of factors contributing to the surge in landlords remortgaging at the moment.

“These include the expiry of the initial term on mortgages taken out ahead of the stamp duty changes for second properties, the expectation of rate rises on the horizon and a desire to minimise interest costs in the face of new mortgage affordabilty rules.

“It will be interesting to see the extent to which mortgage applications for purchases and portfolio extensions increase once these factors have played out.”

Over the same time period, intermediaries said they have seen a drop in the proportion of mortgage applications from first-time landlords, down from 19% to 13% of the total.

They also reported a fall in landlords remortgaging to raise funds in order to extend their portfolios. Remortgaging for portfolio expansion has fallen from 39% to 22%.

Among those landlords looking to remortgage, the proportion seeking to secure a better interest rate reached the highest level ever in Q1 2018.

Compared with three years ago when equal numbers of landlords were remortgaging for a better rate and to raise capital, in Q1 2018 60% of landlords said securing a better interest rate was their primary objective.

This compares with just 30% of landlords who said raising capital was their top priority. As a result, the gap between landlords looking for a better rate and those raising capital is now at the widest seen since 2013.

Source: Mortgage Introducer

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Buy To Let Mortgage Guide For Expats

Buy to let mortgage rules have tightened up for new landlords as well as seasoned investors.

If you are an expat looking to buy or refinance in the UK, then you need to know how the new rules will impact your business.

Deposits – the more an investor ploughs into their investment, the lower the financial risk for the lender, so mortgage interest rates decrease.

Expect to put down at least 20% of the property value – and 40% if you want the very best interest rates.

Fees and other costs – lenders will charge an arrangement fee on completion and possibly a booking fee for a fixed rate deal. The costs vary between lenders, so make sure you ask when working out the buy to let purchase cost

Stamp duty – landlords pay enhanced stamp duty, which is the rate someone who buys a home to live in pays plus 3%. This online stamp duty calculator will work out how much you should pay

Interest only – many buy to let mortgages are borrowed as interest-only deals. Since April 2017, HM Revenue & Customs has started to phase in restricted mortgage interest relief for higher rate taxpayers.

By 2020, instead of offsetting all mortgage interest against tax, landlords will only be allowed a 20% allowance regardless of the rate they pay income tax

Income assessment – this depends on if you are an amateur or portfolio landlord.

An amateur landlord typically has one or two buy to lets or rents out a home they once lived in. lenders will consider affordability against total income rather than on rent generated by a letting property.

Portfolio landlords have four or more buy to let properties and will have the rent and costs of each property assessed, but the final decision will be based on the projected rental income of the property to be mortgaged.

Rent cover – this is a calculation based on the interest paid on the mortgage and the likely rent a tenant will pay. Typically, rent cover is 140% of the annual interest charge at the lender’s standard variable rate, but the cover rate can vary between lenders.

If the rent cover figure is below the cost of the mortgage, the lender will probably make a reduced offer, leaving the landlord to find a bigger deposit.

Source: Money International

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More landlords ‘to quit sector as mortgage relief changes start to bite and profit becomes elusive’

The number of landlords planning to sell some of their buy-to-let properties has hit its highest level for a decade, it has been claimed.

A fifth of landlords said they would offload properties this year as the mortgage interest relief changes start to hit, research by a landlord body suggests.

Restrictions to mortgage interest relief started in April 2017 and analysis of its membership by the National Landlords Association (NLA) claims 20% now plan to reduce the size of their portfolio.

It comes as the membership body commissioned research by Capital Economics to look at the impact of the scaling back of mortgage interest relief, warning that landlords will face paying £850 more in tax on average once the policy is fully implemented in 2020.

This is based on a typical £122,000 buy-to-let mortgage with a 3.5% interest rate, so the losses could be higher if pricing rises.

The report suggests landlords could exit or de-leverage their portfolio but will raise rents first, which it says will be bad for the economy as it will reduce tenant spending power. A flood of new homes on the sales market will also dampen house prices.

Instead, the report recommends the Government reviews the withdrawal of mortgage interest relief and also considers capital gains tax exemptions such as where landlords sell a property to a tenant.

Other suggestions include support for landlords to move properties into a corporate structure where they would retain the right to the relief, and the creation of a government-backed investment vehicle to allow the sale of properties into a managed fund to ensure quality stock is left on the market.

Richard Lambert, NLA chief executive, said: “More and more people are relying on this sector for a home, so it is vital that landlords not only provide a high standard of accommodation, but are incentivised to do so by the prospects of a reasonable return on investment.

“It is our view that these policies are undermining the viability of many landlords’ businesses and removing the incentives to invest in residential property for business purposes.”

Meanwhile, Rightmove also says that landlords may start reviewing their portfolios as the withdrawal of mortgage interest relief begins to take effect, making it harder for landlords to profit from their investments.

It also reports that asking rents outside London increased at their slowest rate – by 0.7% – in three years during 2017.

In London, asking rents ended the year up 1.2% annually to £1,930.

Miles Shipside, director and housing market analyst, said: “Nationally rents have been holding pretty steady over 2017, retaining the 3% plus rises seen in both 2015 and 2016, and adding a more modest 0.7% in the past 12 months.

“Increasingly stretched tenant affordability, and the surge of buy-to-let property supply beating the Stamp Duty tax hike deadline, have acted together to mute landlord pricing power. In contrast, after a few years of falling rents in London they’re back on the up again, due to a combination of tightening stock available to rent and strong demand.

“While the 2017/2018 tax year will see the start of the Government’s changes to tax relief on buy-to-let mortgages, we don’t think this first phase will have that much of an effect on many landlords’ portfolio decisions until another year down the line.

“From speaking to some landlords they’re unlikely to make any decisions to sell up until they see in real-time how much of an impact it has on their finances, with many choosing to take a wait and see view rather than looking at short-term gains or losses.

“However, agents report that there are some highly-geared landlords with large loans looking to reduce their exposure to loss of tax relief by cashing in and selling some properties.”

Source: Property Industry Eye