A raft of recent changes in the law has left many buy to let investors less financially assured than before. The Bank of England now requires many buy to let lenders to impose a tougher rent income requirement, while the Government will soon start lifting the tax relief used by landlords to help pay mortgage interest. In light of all of this, however, there remain ways in which buy to let investors can carefully balance their rental income and mortgage repayments.
What fresh challenges have arisen for landlords?
As 2017 began, the Bank of England started imposing tougher rules on buy to let lenders affected by banking regulation. Now, these lenders must ask landlords to show that their rental income would cover 145% of their mortgage payment if the rate of that mortgage grew to 5.5%. Until recently, the norm that lenders applied was 125% at a better rate.
Landlords have, according to a report by This is MONEY.co.uk, warned that hiking rents might be their only option for enabling themselves to jump this higher hurdle. Furthermore, with the start of the 2017-18 tax year in April, landlords will start losing a tax relief that they commonly put towards paying mortgage interest. Landlords on the higher rate of tax will see their tax relief level decline from the current 45% to a 20% flat rate. Effectively, with this change, landlords will be taxed on their turnover rather than simply what profits they have left after paying mortgage costs.
How can landlords break out of a buy to let mortgage “prison”?
There have been cases of “buy to let mortgage prisoners”; landlords who, while on mortgage deals, can’t switch to a more favourable rate as they can’t pay off a significant portion of their current loan. Therefore, these landlords could feel that they have no choice but to completely abandon the buy to let market. However if these changes will leave you struggling as a landlord, there are ways in which you might be able to relieve the financial burden.
Firstly, thoroughly educate yourself about the changes; 1.4 million landlords remain unaware of them, LettingAgentTODAY recently reported. Next, consider extending your mortgage’s term to reduce how much you monthly need to pay the lender. You could also invest in a different region that looks likely to enable better buy-to-let returns in the future. Research cited by What Mortgage suggests that Yorkshire and the East Midlands will fare the best in this respect.
You could set up a company that will handle the property
Exempt from the tax changes will be landlords holding properties via a limited company instead of in their own name. Therefore, you could form a limited company before transferring property ownership across. This done, you will be able to fully claim back financial expenses and need to pay corporation tax on profits. While this move could be too costly for existing properties, it might be worthwhile if you seek to buy a new property with a buy to let mortgage from Mortgage Solutions.