When it comes to arranging a mortgage for investment property in the UK, there have been a few changes recently. These changes were enforced on almost all lenders by the UK lending regulator, the Prudential Regulation Authority (PRA), in January and September 2017 further compounded by tax changes affecting the UK market.
In 2015, the Government outlined their intention to limit the attractiveness of the property investment market in an attempt to make it easier for first time buyers to get on the property ladder. There followed a number of tax changes;
- Stamp Duty Land Tax (SDLT) was increased by 3% for anyone buying a property that already owned another UK property.
- Capital Gains Tax (CGT) was reduced BUT gains from property were exempted from this overhaul.
- Mortgage Interest tax relief against rental income was disallowed being replaced instead with a Tax Credit effectively restricting tax relief to basic rate tax only (phased in over 4 years). This could push a previously basic rate tax payer into a higher rate band, a subtle change that may not have been immediately obvious to all investors.
Although the new SDLT tax regime applies to individual and corporate investors alike, properties owned by limited companies are still able to deduct mortgage interest costs from their rental income before calculating taxable profits. For some investors it may now make sense to purchase buy to let properties through a limited company.
The picture here is further complicated by recent changes to tax on dividends, increased personal allowances and income tax thresholds as well as reduced rates of Corporation Tax.
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In January 2017, the PRA instructed all lenders it regulates to tighten up their affordability calculations, reducing the maximum loan amount for any given rental yield.
The PRA were concerned that lenders were reducing their underwriting standards to obtain increasing volumes of business on their books.
Further changes were made in September 2017. These changes created a new type of investor, a portfolio landlord (any landlord that owns four or more mortgaged Buy to Let properties).
Lenders must now look into a mortgage application in more detail than before for portfolio landlords, to consider the overall portfolio of the applicant together with the costs of running the portfolio, including taxation costs, before deciding on the maximum loan. They must also consider the applicant’s income and living expenses.
These changes mean the investment market is less likely to be attractive to the one off or accidental investor ( eg those investors that retain their residential property as an investment when moving or inherit properties). Lenders will require more information than they did in the past, in particular concerning tax records and running costs of portfolios, the individual’s personal financial position regarding living costs, unsecured debt, number of dependants etc.
Key to success in the finance application will be a suitably qualified mortgage specialist. They will need to understand the applicant’s long and short term objectives fully before starting on the research for the right lender. They will need to ensure the applicant has the right legal and taxation advice so that a suitable type of ownership can be established which in turn should point them to a reduced pool of lenders matching the applicant’s profile.
Now, more than ever before, the role of a mortgage expert is key to the investor’s successful finance application.
ABOUT THE AUTHOR
Mark Stanton has been active in the mortgage industry for more than 25 years and holds a range of qualifications from the Chartered Insurance Institute. Since 2000, he has been a founding member of VA Mortgages, who specialize in high-quality mortgage advice for the UK housing market.