Landlords who use smaller brokerages have been worryingly slow to prepare for the changes to income tax relief
It was always accepted by the buy-to-let market at large that 125 per cent at 5 per cent was a responsible stress test. However, given the imminent changes to landlords’ income tax, it is inconceivable any lender could now consider the historical formula responsible lending. So I am pleased the majority have adjusted their affordability calculations.
We have seen a fast shift by landlords towards incorporation, particularly for new BTL purchases but increasingly for ‘transfers’ from personal to limited company ownership.
Unfortunately, this shift is not being replicated as quickly by landlords who use smaller brokerages, particularly sole traders. Recent straw polls at events found only around 15 per cent of brokers had handled a limited company BTL case. I am concerned that somewhere down the line there may be some unpleasant repercussions. Think PPI scandal.
Many brokers also seem unsure of what will be expected of them when advising portfolio landlords. Here are a few pointers:
- Refer to the official document – PRA Supervisory Statement SS13/16: Underwriting standards for BTL mortgage contracts.
- HMRC clarification includes ‘Changes to tax relief for residential landlords’ and ‘How it’s worked out’.
- Keep abreast of related fiscal and regulatory developments. Mortgage Strategy has been very vocal on the subject and there are other web blogs and articles.
- Take time to understand lenders’ criteria. Start with specialists that already have procedures to handle these deals: Aldermore Bank, Axis Bank, Foundation Home Loans, InterBay Commercial, Kent Reliance, Keystone Property Finance, Paragon Mortgages and Shawbrook Bank. Criteria are likely to change as lenders develop policies and processes to comply with the new guidelines, so review regularly.
- Learn about limited company structures. Gov.uk is a good source.
Talk to other brokers: there are lots of online forums; if you are part of a network, ask about training and guidance; and attend industry events.
Talk to your clients: share your knowledge; ask every client to take professional advice on how the tax changes affect their portfolio; and encourage your portfolio clients to prepare for 1 October by filing tax returns, compiling a spreadsheet of their entire portfolio including mortgage details and rental income, and keeping up to date on income and expenditure.
It is a massive task but one to avoid at your peril.
David Whittaker is chief executive of Mortgages for Business