By knowing about and understanding the buy-to-let changes, you can guide your landlord clients towards some exceptions
With the speed at which the buy-to-let market is altering, the role of the broker is more important than ever. But how do you keep on top of the changes?
Perhaps the most significant of these took place on 6 April, limiting tax relief for landlords on mortgage interest and other finance costs to the 20 per cent basic rate of tax. This is being phased in over four years, causing a real hit to higher-rate taxpayers.
In addition, new PRA rent stress tests applied on 1 January have meant many landlords finding they could borrow less than before. Most lenders now require rent to be typically 145 per cent of mortgage payments at an assumed interest rate of 5.5 per cent.
The new rules are designed to cool the market but, by knowing and understanding the changes, you can guide your clients towards some exceptions.
The tax changes affect only property held in a personal name. That held inside a limited company will still be able to offset all the mortgage and finance costs before tax is calculated. Another benefit of buying via a limited company is that lenders have the flexibility to offer a more favourable rental calculation – typically 125 per cent – because these properties likely have a lower future tax implication.
Other exceptions are like-for-like remortgages, with transitional rules giving lenders discretion to bypass the new stress tests.
Fees can be added to the mortgage, allowing the landlord to raise capital as long as it is purely for business purposes. Unfortunately, raising capital to grow a BTL portfolio is not classed as a business purpose.
Some lenders have already adopted the like-for-like exception: Santander recently announced lower rental calculations for like-for-like BTL. There are signs that many more will follow.
Five-year plus fixes
Another way to avoid the PRA’s stress tests is through a fixed-rate BTL mortgage for five years or more. The rules allow such fixed rates to sit outside the standard calculations because landlords are cushioned against interest rate increases for the period. This means they can borrow more than they could with shorter-term deals.
Other circumstances enable landlords to continue to claim the full higher-rate tax relief and are exceptions to the PRA’s requirements. These include: bridging loans, furnished holiday lets, and commercial and semi-commercial property.
The key rules for holiday lets are that the home is fully furnished and the landlord intends to make a profit. The property must be available for let for at least 210 days of the year and actually let for at least 105 days.
In addition to the benefit of continuing to offset all finance costs, there are other tax advantages around capital gains tax and capital losses.
Commercial property, let out to businesses rather than individuals, does not incur the 3 per cent stamp duty surcharge on additional properties.
Commercial loans are also not affected by the changes to mortgage interest relief, so any commercial loan payment can still be offset against the income generated before tax is calculated.
Interestingly, semi-commercial property benefits in the same way as pure commercial property with regard to stamp duty, PRA standards and an apportionment of tax relief.
While the mortgage market for holiday let and commercial property is not as well catered for as other types of letting, some key players consider loans for these types of purchase, and competition is increasing.
If you are not experienced in this market, you may wish to consider a specialist packager to help you navigate the options.
Liz Syms is chief executive of Connect for Intermediaries