Property landlords
Liz Syms, CEO and Founder of Connect Mortgages
With the speed at which the buy-to-let market is altering, the role of mortgage brokers is more important than ever. Staying abreast of these transformations is essential, especially considering the rapid pace of change. One of the most impactful shifts occurred on April 6, implementing changes that curtailed tax relief for property landlords on mortgage interest and other financial costs, limiting it to the 20 per cent basic tax rate. This modification, phased in over four years, particularly affects higher-rate taxpayers, presenting 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 experience the impact of tax changes exclusively on properties held under personal names. However, when properties are held within a limited company, there remains the ability to offset all mortgage and finance costs before tax calculations.
Purchasing through a limited company brings an additional advantage, as lenders can provide a more advantageous rental calculation, often around 125 per cent. This flexibility arises due to the expectation of lower future tax implications for properties owned by limited companies. This nuanced approach safeguards against certain tax changes and provides favourable financial considerations for property landlords opting for the limited company structure.
Comparable Remortgage Options
In addition to the new stress tests, there are certain exceptions, such as comparable remortgages, where lenders can use transitional rules.
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 the category of 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
To sidestep the stress tests imposed by the PRA, an alternative strategy involves opting for a fixed-rate Buy-to-Let (BTL) mortgage for five years or more. The regulatory framework permits these extended fixed rates to exist outside the conventional calculations.
This unique arrangement safeguards property landlords against potential interest rate hikes throughout the specified period. Consequently, property landlords gain the flexibility to secure higher borrowing amounts than what would be attainable with shorter-term mortgage deals.
Furthermore, several exemptions exist within the PRA’s requirements, allowing property landlords to maintain eligibility for full higher-rate tax relief. These exceptions encompass various scenarios, such as bridging loans, furnished holiday lets, and commercial and semi-commercial properties.
Landlords can strategically navigate the regulatory landscape by exploring these additional avenues, ensuring financial resilience and optimal tax benefits.
Holiday lets
When engaging in holiday lets, ensuring that the residence is completely furnished and that the landlord intends to generate a profit is crucial. Furthermore, the property should be open for rental for a minimum of 210 days per year, with actual rentals occurring for at least 105 days.
Apart from the advantage of offsetting all financial expenses, there are additional tax perks related to capital gains tax and capital losses. These benefits can provide a more favourable financial outcome for property owners engaged in holiday lets. By adhering to these rules and exploring the various tax advantages, property landlords can optimise their returns and enhance the overall profitability of their vacation rentals.
Commercial properties
When it comes to commercial properties, which are leased to businesses rather than individuals, one notable advantage 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 concerning stamp duty, adherence to PRA standards, and the apportionment of tax relief.
Despite the fact that the mortgage market for holiday lets and commercial properties may not be as well-established as that for other rental types, there is a growing interest among key financial institutions to provide loans for such acquisitions. This has led to increased competition in this niche market.
For individuals navigating this specialised market without prior experience, seeking assistance from a specialist packager is advisable. These professionals can guide you through the various options available, ensuring informed decision-making in the complex landscape of commercial real estate financing.