Buy To Let Investors Update
As you will know from previous updates, the tax rules on the treatment of BTL mortgage interest change next April.
Whilst some commentators suggested that the proposals may be reversed or reduced, that does not currently look likely. As a result there will be an increasing restriction of tax relief for higher rate tax payers over the next 4 tax years.
One of the options for larger property investors has been to incorporate their portfolios into a limited company, but this is a big, complex decision and requires very careful planning. In particular, the change in ownership from personal names to a company structure can have significant implications where investors have a number of loans with different providers and often at relatively low rates.
However, as you might expect, lenders are adapting to the new rules and offering a range of solutions, including portfolio loans to companies at quite competitive rates, and applying entirely different criteria than they do on personal loans.
Dave Ottley of Balance for Business, highlights the key issues, and the possible impact for various levels of BTL investor.“The recent policy statement from the Prudential Regulation Authority (PRA), clearly states that there is now a deadline for implementation of the key Interest Cover Ratio (ICR) changes from all lenders, by the end of this year. This will effectively mean that Limited Companies, will have the ability to borrow at higher loan to value ratios than individuals. Ultimately though with the majority of the landlord community being private individuals rather than limited companies, they will need to adjust to lower levels of available debt and will therefore require more equity, or have to grow at a slower pace than was previously possible.
We are also likely to see a potential shift in investor strategy to higher yielding properties, (flats, multi-units on 1 title, HMOs, mixed use schemes etc.), as well as potentially different regions where higher yields exist. Whilst this strategy will now come into place for many landlords, previous experience in these sectors is crucial to securing competitive funding in the future.
However, this may mean more collateral risk for investors or lower capital appreciation potential in the longer term. It is also worth noting that longer term fixed rates are likely to enable higher gearing, (these are excluded from the stressed interest rate requirement), but investors need to make sure they are able to refinance at expiry or they risk being left on high reversion rates without the ability to refinance.
Another key point being made is the definition of a portfolio landlord when they reach four properties. At this level, all funders will have to adopt a “specialist underwriting approach”, which will ultimately mean a more manual and bespoke assessment of their entire portfolio, rather than treating new purchases on a “standalone” basis. Investment Landlords will see some disruption among existing lenders as they adapt to this requirement.
These changes will lead to an adjustment for investors, but the fundamentals of the Private Rented Sector (PRS) remain strong which will also be supported by further price competition as recent Bank of England liquidity filters through to customers.”
We have also seen a vast increase in the number of light & heavy re-furbishment projects, with many landlords choosing to complete relatively quick turnaround projects, with a view to increasing their working capital & placing larger deposits on new investment projects. This method of increasing cash stakes for new purchases is proving extremely popular.”
As you can see, the whole of the property market continues to evolve and adapt to the financial, regulatory and economic environment. With investment yields from other alternative investments still being comparatively low, property remains a sound investment for experienced investors, and has great potential given the increasing gulf between demand for housing and the number of houses available or being built.
Be right to reduce your tax bills, give us a call.
MH&CO and B4B logos and contact details.