As a result of the new tax changes brought in in May 2017, many lenders’ buy-to-let (BTL) subsidiaries have changed their policies when it comes to lending to landlords.
A lender’s required rental calculation now means that landlords need to cover 145% of mortgage costs with their rental income.
The changes are thought to have come about as a result of lenders looking to help landlords in not over-extending their portfolios after the tax changes introduced in April and the Bank of England’s whitepaper on how buy-to-let underwriting standards need to improve.
What tax changes?
Announced in the 2016 Autumn Statement, mortgage interest rate relief is now limited to the basic 20% income tax rate, meaning that higher and top-rate tax payers no longer get full tax relief.
The changes are being phased in and from 2017-18, the deduction from property income will be limited to 75% of the finance costs, with the remaining 25% being available as a basic rate tax deduction.
From 2018-19, the deduction from property income will increase to 50% and 50% will be given as a basic rate tax reduction.
This will continue until 2020-21, when all costs incurred by a landlord will be given as a basic rate tax reduction.
When this time comes, those landlords with low rent may feel the burden as, for example, a £120,000 BTL mortgage at a rate of 4% would cost approximately £4,800 per year in interest.
How can I try and protect myself from making a loss?
If the market is in a place to accept it, the natural thing would be to increase your rent.
As most landlords are going to be affected by the changes, it’s likely that rents across the country will increase over the next few years so it may be the way the market naturally goes.
However, as rents increase, tenants will also begin to feel the burden, so this can only go so far.
It’s unfortunate to say that some properties may simply not be profitable under the new changes, so it’s important to plan ahead as far as possible.
You could also consider cutting your mortgage costs as it’s the mortgage that the tax relief changes apply to so if you can remortgage onto a lower interest rate, you could end up paying less tax than you would if you stayed on the rate that you’re currently on, but remember that there are fees that apply when you exit a mortgage.
The coming tax changes give landlords a big incentive to review their portfolios, and financing is a key part of that. Getting the right mortgage could make a huge difference.
For advice on the right buy-to-let mortgage for you, speak to one of our expert advisers who will be able to help you with the next steps.