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Buy to let has proven one of the fastest growing parts of the property market lately, with lenders offering generous loans at super low rates to expand within the sector. Until now lenders have relied on landlords to rapidly increase rents in line with customer demand, however, since drastic tax increases were applied in the summer, that could all be set to change.
Since tax changes were announced, buy to let mortgage rates have fallen considerably with the average 2 year fixed rate sinking from 3.39% to 3.26%. This may seem like great news – but such generous offers will not always factor in drastic tax increases. With changes announced in the July budget set to be applied in the near future, it’s more important than ever that lenders ensure borrowers are aware of tax implications before taking out a loan.
Tax relief on mortgage interest has been slashed to the basic rate of 20% for buy to let, meaning that landlords are no longer able to deduct the cost of their mortgage interest from their rental income when calculating a profit on which to pay tax. Ensuring the maths works out correctly on every new purchase is essential, as the tax relief you are able to claim on monthly interest repayments has reduced compared to the existing 45% – regardless of your personal top tax rate. For higher-rate tax payers, this means effectively paying tax on mortgage interest, in addition to the interest itself.
Curbing the buy to let market with tax cuts seems a severe action to take, with 1 in 5 landlords supposedly being hit hard by the changes. However, the Chancellor’s decision to cut mortgage interest relief came with the intention to tax landlords on their turnover rather than profit, effectively making tax payable on non-existent income. This was to create a more level playing field between those buying a home to live in and those buying to let.
This of course, does not come without its flaws. Critics have warned that thousands of buy to let investors are now in danger of profitable investments turning into losses. A significant number of landlords are equally nearing retirement age and opting to invest in property to fund their retirement… So is buy to let now an option too risky for ‘gran-lords’ and landlords to invest in?
It’s all pretty overwhelming, especially as landlords get to grips with not deducting mortgage interest as an expense from their profits, and instead being given a 20% tax credit on their eventual tax bill.
If that wasn’t enough to be dealing with, landlords have yet another factor to consider – identity checks! Changes within the buy to let market have now introduced immigration status checks, which will come into action in February 2016. All private landlords will be required to check the immigration status of every potential occupier before renting out a property, with evidence of the tenant’s identity, citizenship, passport or biometric residence permit.
Over the last year, demand for rental properties has risen by 52%, a figure which is set to continue to climb alongside rising house prices, with a surge of buy to let landlords now searching for mortgages on lower priced properties.
As rental demand remains strong nationwide, the potential of more attractive yields is still available when opting for a cheaper property. Many landlords have been looking to invest in areas outside the South of England, with the hope that property prices won’t hold them back from making a profit.
We know that a whirlwind of tax changes can knock you off your feet when searching for a mortgage, especially with the urgency to now fix your finances before changes come into place. At Enness, we have contacts with every type of lender across the market and a wealth of knowledge surrounding the buy to let sector. With our own wealth management team now running with force as part of our private office service – we will ensure that you’re prepared for 2016 as a buy to let investor.
If you wish to find out more about the current buy to let options available, need some free tailored advice or more information regarding tax implications, we are here to help. Feel free to contact one of our expert advisors anytime.