Every time such landlords refinance one property or buy another, mortgage lenders will have to assess their income across their whole portfolio.
The Bank of England’s Prudential Regulation Authority is looking closely at the Buy-to-let market. It has tightened the affordability rules for landlord from January this year. Last year it introduced a 3% extra stamp duty on buy-to-let. Tax relief on mortgage interest has been cut since April 2017. Additionally from next year, a ban on tenant fees and a one month cap on deposits will take effect.
Under the rules that came into effect In January this year, most lenders require the rent to cover 145% of the mortgage payment on any but-to-let. This is up from 125%. This is regardless of the number of properties they own. This increase makes it harder to borrow and often larger deposits are needed.
The mortgage lenders are interpreting the new rules in different ways. Presently most are extending their rent ratio requirements to the whole property portfolio. This will not affect landlords with less than four properties. Many lenders are looking for the following-
However, some lenders do not need any of this but the interest rate offered might be slightly higher.
Lenders will also look more closely at personal income. Some are setting minimum income levels.
Generally, the mortgage rates are higher if you buy through a limited company. The choice of lenders is also limited and the amount you can borrow is often lower. However with the changes in the way buy-to-let income is being taxed it is still worth considering.
Transferring existing properties into a company rarely make sense as you will have to pay stamp duty at the higher rate and also capital gains tax on any increase in the property’s value since it was bought.
From April this year, landlords have been able to offset only seventy-five per cent of their mortgage interest payments against rental income before calculating the tax due. This changes to fifty per cent next year, the twenty-five per cent the year after. It eventually falls to zero in the tax year 2010-21. In its place, they will only be able to apply for twenty per cent tax relief. This has more of an impact on higher and top-rate taxpayers.
Some basic rate taxpayers will also be affected since the changes could put them in a higher tax bracket. This may affect things such as child benefit.
Taking advice from your accountant or tax adviser has never been more important.
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