M is for Mortgages, and other sweeping changes in lending affecting the buy-to-let market for investors
Changes in taxation, or more specifically capital gains tax in the U.K. is not the only change to affect the buy-to-let market in 2017. As well as a 3% increase in capital gains, tax on income from rental properties has soared.
Within mortgages, prudential lending will introduce a number of new measures making the challenge of obtaining investment properties and developing portfolios more difficult.
Many long-term existing buy-to-let investors are sitting comfortably on low mortgage rates, having seen standard variable rates fall as base rate was slashed down to 0.5%.
Some buy-to-let deals before the financial crisis did not have typical SVRs but a revert rate that tracks the bank rate. Long-term landlords are benefiting from that still.
However, new buy-to-let mortgage deals remain more expensive than residential deals and require a bigger deposit. If investors are willing to accept that they may find the value of their property slides in the short term, and can ensure their property meets the criteria of 75% loan-to-value and returning 125% of monthly mortgage payments then it can still be a good long-term investment.
Key Changes to be aware of:
The Stress Test
From January 2017, The PRA has required lenders implement into their criteria an Interest Coverage Ratio Test (and/or) a personal income affordability test at rates of 5.5% for the first five years of the mortgage.
The lenders in such affordability test must take into account any tax liabilities, income and costs associated with renting a property.
Mortgage interest relief reduction
From April 2017 landlords who own buy-to-lets in their own name will see tax relief on mortgage interest tapered back from a maximum of 45% and replaced with a flat 20 per cent tax credit by 2020.
Together with the 3% stamp duty surcharge, forming a limited company may be a more viable option.
Portfolio investors and the PRA
From September 2017, landlords with four or more mortgages should be aware of new rules laid out by the Bank of England’s Prudential Regulation Authority (PRA) which require the submission of income and mortgage details on all of them every time a property is refinanced or a new one is purchased with a mortgage.
What comes down, will go back up!
Mortgage rates are at record lows and present a number of
opportunities for buy-to-let investors. But, rates will eventually climb and this will impact on returns, so it’s important to ensure that investments can stack-up.
The Complete Zeitgeist 2017
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