Alan Cleary: MCD is nothing to be scared of

Last year was a great one for the mortgage market in many respects, and incredibly busy for those in the intermediary sector. This year looks set to be another exciting but challenging one, with regulatory and tax changes all set to make an impact in the first few months.

We have known for some time about the Mortgage Credit Directive arriving in March and both lenders and intermediaries have been preparing. But what will the impact be?

In my view, first charges will be relatively unaffected but there will be market confusion as some lenders will use KFI+ and others will adopt ESIS. No doubt sourcing systems will have issues dealing with the duplication.

Changes to a binding offer are not likely to present any problems for lenders or intermediaries and consumer buy-to-let should be pretty straightforward, although intermediaries operating in this space will need FCA authorisation.

The big impact will be in second charges. All lenders will be issuing ESIS but we will see changes in product design, making second charge products look very similar to firsts. For example, I expect to see residential seconds with early repayment charges, free valuations and maybe even cashbacks.

The processing of second charges will align with firsts, and some networks and clubs are likely to strike deals with lenders to go direct. Packagers will enter the residential space and compete with master brokers for business but most consumers will still probably buy via comparison websites.

Affordability changes on second charge loans are likely to make the market contract until we eventually see a rate rise that will drive and reinvigorate consumer behaviour.

Meanwhile, the BTL market has a very interesting year ahead as Financial Policy Committee powers come into force and a raft of taxation changes begin to be phased in from 1 April.

Tax year 2016/17

Effective from 1 April, an additional 3 percentage points will be added to stamp duty land tax rates for BTL and second property transactions. For furnished properties, wear and tear allowance will be abolished, and landlords will only be able to claim actual expenditure on new or replacement items.

The FPC will be granted powers of direction over the BTL mortgage market in the same way as it has over residential mortgages. It is not known whether these powers will be utilised but they could include loan-to-income caps and/or interest rate stress tests.

Tax year 2017/18

Twenty-five per cent of the mortgage interest will be added back to the rental profit and the tax calculated according to the tax bracket the landlord falls into: either at basic rate (20 per cent) higher rate (40 per cent) or additional rate (45 per cent).

A deduction of 20 per cent of the interest that has been disallowed will be taken from the tax payable.

Tax year 2018/19

Fifty per cent of the mortgage interest will be added back to the rental profit and the tax calculated according to the tax bracket the landlord falls into. A deduction of 20 per cent of the interest that has been disallowed will be taken from the tax payable.

Tax year 2019/20

Seventy-five per cent of the mortgage interest will be added back to the rental profit and the tax calculated according to the tax bracket the landlord falls into. A deduction of 20 per cent of the interest that has been disallowed will be taken from the tax payable.

Tax year 2020/21

One hundred per cent of the mortgage interest will be added back to the rental profit and the tax calculated according to the tax bracket the landlord falls into. A deduction of 20 per cent of the interest that has been disallowed will be taken from the tax payable.

In addition, from April 2019, a payment on account of any capital gains tax due on the disposal of residential property will be required to be made within 30 days of the completion of the disposal. This will not affect gains on properties that are not liable for CGT due to private residence relief. The Government will publish draft legislation for consultation this year. Currently the payment window is up to 21 months.

There will inevitably be some softening in the BTL market but the headlines predicting its death are miles wide of the mark. Impacts to basic rate taxpayers are minimal and to higher and additional rate taxpayers they will be moderate and manageable, with relatively small increases in rents phased in over the next five years.

Low yielding, high value properties will see the biggest impact but, arguably, the people who invest in this type of asset can afford some negative cash flow provided the property is enjoying reasonable levels of house price inflation. Full steam ahead.

Alan Cleary is managing director at Precise Mortgages