Still reeling from the imposition of a 3% Stamp Duty surcharge on second and subsequent residential properties and the abolition of the 10% wear and tear allowance, buy-to-let landlords took another body blow in April of this year.
That’s when the deduction of mortgage interest costs from their rental income began to be phased out, decreasing by 25% each year until 2020 – when it will cease altogether.
A massive tax burden
The implications of taxable turnover, as opposed to profit, are enormous for landlords – many of whom will be really struggling. If mortgage rates rise, but rents remain static, some tax rates could exceed 100%. Any profit will be eaten up by the taxman, who will then want even more.
Nor does this only apply to higher rate taxpayers; additional rate taxpayers will see their income disappear when mortgage repayments reach 68% of the rental yield. Even basic rate payers are at risk of being pushed into a higher bracket.
But it goes from bad…
At the beginning of this year, buy-to-let mortgage lending criteria were adjusted. Up until then, borrowers had to prove that the cost of the mortgage was covered x 1.25 by rental income.
But now the Prudential Regulation Authority insists that this figure must be attainable even if mortgage interest rates were to rise to 5.5% – potentially catastrophic given that some current buy-to-let mortgage rates are as low as 1.44%.
And there’s a new Affordability Test too, whereby borrowers have to prove they can keep up repayments even after taking into consideration National Insurance payments, all renting-associated costs, income net of tax, credit/expenditure commitments and living costs.
From September 30th 2017, however, landlords with four mortgaged properties or more may be subject to the scrutiny of their entire portfolio before a mortgage can be offered on a further single property.
Speaking to the Daily Telegraph, Ray Boulger of brokers John Charcol, expressed concern:
“The rules say the whole portfolio must be viable. Let’s say you have ten properties and eight are generating rental income in excess of mortgage payments and the other two are not, but the shortfall is covered by the other eight.
Is that going to be acceptable? For some lenders it will, for others it might not be.”
Further confusion is likely to be caused by property ownership via a limited company – a popular strategy which preserves higher rate tax relief. A portfolio comprising privately-owned alongside company-owned properties presents an ambiguity, according to Boulger:
“If you own part of a limited company that owns some properties, and you have three other properties in your name, will that be considered as being more than four?”
Given the circumstances, buy-to-let looks an increasingly unattractive option – but the industry advice is that if you want another buy-to-let mortgage, get one before the end of September; there is speculation that some lenders will be giving up on the sector entirely.
Alternatively, any buy-to-let landlord who’s had quite enough of being treated like a political football might like the sound of 8-12% NET fixed income for 10 years.
Better still, a completely effortless income – no more calls in the middle of the night, just full onsite management and no further costs whatsoever.
And you may be interested to hear that prices compare very favourably with the deposit required for a buy-to-let mortgage.
Have a browse through our purpose built student accommodation and serviced apartments portfolio; it offers a truly viable alternative.