If you’re a property investor, then the chances are that you’ve heard all about the changes to the buy-to-let mortgage market, which are set to take place later this month. As a mortgage broker in Huddersfield, we can help to explain this widely-talked about topic.
These overhauls are still something that many people don’t understand — a little like Brexit, you could say!
But if you are building a portfolio of houses, then it’s important that you know how it might affect you — especially when coupled with recent taxation changes.
So firstly, we explain the reforms to stamp duty and tax relief, before discussing the mortgage market and how landlords can maximise their investment.
Stamp duty increases
Stamp duty has applied to properties in the UK with a value of £125,000 or more since 2003. But last April, an additional 3% surcharge was placed on the purchase of second and subsequent residential properties worth over £40,000.
For a £250,000 house, this fee would normally be 2% of the portion from £125,001 to £250,000 which would be equal to £2,500. There would also be an additional fee of 3% on the whole price of the house if it’s classed as an investment or second property. That’s a hefty £7,500 in extra charges.
Up to £125,000
Over £125,001 – £250,000
Over £250,001 – £925,000
Over £925,001 – £1.5m
Rates for Second Properties
Tax relief clamp down
And at the same time as these stamp duty increases, landlords also lost tax relief on their mortgage costs. Before April 2017, investors only needed to declare rental income after the cost of their loan, i.e. their profit, but this was clamped down on earlier this year. Inevitably, this will result in increased tax bills for many landlords.
Stricter buy-to-let mortgages
The changes don’t end there, because this month, stricter lending legislation also came into play.
Aimed at portfolio landlords — those with four mortgaged properties or more; the changes mean that investors will have to comply with new lending standards.
Lenders are set to amend the way they assess affordability and risk, meaning that borrowers will have to prove that any other properties they own won’t be affected by taking on another loan.
Investors’ earnings will be taken into account, to ensure that they can sustain all associated costs. An Income Coverage Ratio (ICR) may also be applied to measure the landlord’s financial health and the likelihood of bankruptcy.
This will mean more stringent checks and underwriting procedures, which has led to some smaller lenders announcing that they will pull out of the buy-to-let market.
What does this mean for property investors?
While the industry is taking a cautious approach to buy-to-lets, they are still a great investment option, especially for those with a big deposit.
The property market is bouncing back, meaning that people are buying houses in the hope that values will again start to rise. Plus, low mortgage rates and rents that will rise with inflation make it an attractive proposition.
The key to making a good investment is to become focused on tightening costs and receiving specialist advice.
For example, tax experts will be able to tell you whether setting up a limited company may help you to avoid additional levies.
It will also pay to speak to a buy-to-let mortgage advisor, such as us at KB Mortgage Services. We can talk you through the lenders that are gearing up for these changes and find you the best deal. We can also weigh up whether you are better off getting a fixed or tracked mortgage.
If you already have investment properties, then now is a good time to remortgage to slash your outgoings — as reports indicate that interest rates will rise in the near future.
And if you are looking to expand your portfolio, then another way to reduce your overall mortgage is by negotiating on the price of a house. Investors are often in a strong position to haggle because they’re not usually in a chain, unless they are selling a property to fund their next purchase.
Not all Buy to Let Mortgages are regulated by The Financial Conduct Authority.
Your property may be repossessed if you do not keep up repayments on your mortgage.
Approval number: Sol6022