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Property Landlords | Brokers Must Prove Their Worth

Property Landlords

Property landlords

Liz Syms
Liz Syms, CEO and Founder of Connect Mortgages

 

With the buy-to-let market changing rapidly, mortgage brokers’ roles are now more important than ever. Due to the fast pace of change, staying updated is essential. A significant shift occurred on April 6, reducing tax relief for property landlords on mortgage interest. This relief is now limited to the 20 per cent basic tax rate. Phased in over four years, this change mainly impacts higher-rate taxpayers, which presents a considerable challenge for property landlords.

Adding to the complexity, introducing new PRA rent stress tests on January 1 has led many property landlords to discover reduced borrowing capacities. Presently, most lenders stipulate that rent should be approximately 145 per cent of mortgage payments, calculated at an assumed interest rate of 5.5 per cent.

While these regulatory adjustments are intended to temper the market, a profound understanding of these changes empowers brokers to navigate exceptions for their property landlords. By staying informed and adeptly interpreting the modifications, brokers can guide their property landlords through the intricacies of the evolving buy-to-let landscape. Mortgage brokers play a crucial role in adapting to these changes and ensuring the success of their investments in this dynamic market.

Impact of tax changes on Limited Companies in property ownership

Limited companies are affected by tax changes only on properties held under personal names. However, properties within a limited company can offset all mortgage and finance costs before tax calculations.

Purchasing through a limited company offers an advantage. Lenders can provide a more advantageous rental calculation, often around 125 per cent. This flexibility is due to the expectation of lower future tax implications for properties owned by limited companies. This approach safeguards against certain tax changes and provides favourable financial considerations for landlords choosing the limited company structure.

Comparable Remortgage Options

In addition to the new stress tests, lenders can use transitional rules in certain exceptions, such as comparable remortgages.

In these cases, fees can be incorporated into the mortgage, enabling property landlords to generate capital for strictly business-related purposes. It’s essential to note that capital raised for expanding a Buy-to-Let (BTL) portfolio does not fall under business purposes.

Notably, some lenders have already embraced the comparable remortgage exception. Santander, for instance, recently introduced reduced rental calculations specifically for comparable BTL scenarios. This move suggests a growing trend, indicating that numerous other lenders may soon adopt similar measures. This development could potentially provide more options and flexibility for landlords in managing their property portfolios.

Five-year-plus fixes 

An alternative strategy is a fixed-rate Buy-to-Let (BTL) mortgage for five years or more. This approach helps sidestep the PRA’s stress tests. The regulatory framework allows extended fixed rates to exist outside conventional calculations.

This unique arrangement protects property landlords from potential interest rate hikes during the specified period. Consequently, landlords can secure higher borrowing amounts than with shorter-term mortgage deals.

Several exemptions exist within the PRA’s requirements, allowing landlords to retain eligibility for full higher-rate tax relief. These exceptions include bridging loans, furnished holiday lets, and commercial and semi-commercial properties.

Landlords can navigate the regulatory landscape by exploring these additional avenues, ensuring financial resilience and optimal tax benefits.

Holiday lets

When engaging in holiday lets, ensure the residence is fully furnished and intended for profit generation. The property should be available for rental for at least 210 days per year and a minimum of 105 days annually.

Besides offsetting all financial expenses, there are extra tax perks for capital gains tax and capital losses. These benefits can provide a better financial outcome for holiday let property owners. Landlords can optimise returns and boost vacation rental profitability by following these rules and exploring various tax advantages.

Commercial properties

One notable advantage of commercial properties leased to businesses rather than individuals is the exemption from the 3 per cent stamp duty surcharge applied to additional residential properties.

Furthermore, the changes in mortgage interest relief do not impact commercial loans. This means that payments on commercial loans can still be deducted from the income generated, providing a valuable tax offset.

It’s worth noting that semi-commercial properties share similar benefits with pure commercial properties regarding stamp duty.

Semi-commercial and pure commercial properties adhere to PRA standards and apportion tax relief accordingly.

The mortgage market for holiday lets and commercial properties is less established than other rental types.

Key financial institutions are increasingly interested in providing loans for these acquisitions, enhancing competition in this niche market.

Individuals without experience in this specialised market should seek assistance from a specialist packager.

These professionals guide you through various options, ensuring informed commercial real estate financing decision-making.

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