The Prudential Regulation Authority, part of the Bank of England, has made a proposal to impose additional rules on private landlords/buy-to-let investors, which will be implemented, as of 30 September 2017. Joanne McIvor, Partner and Hayley Cloherty Associate, at Edwin Coe LLP report the following:
The new rules mean that lenders will be forced to apply stringent rules against applications for buy-to-let mortgages, by private landlords, with four or more mortgaged properties.
- Lenders may be forced to review a landlord’s entire portfolio, when offering a mortgage on a single property.
- Lenders may require proof of rental income and a business plan to support a new application.
- Landlord borrowers could find the amount they can loan will be restricted, if they fail a “stress test” across their portfolio.
It will be interesting to see how the new rules apply in practice. For example, if a landlord owns four or more properties – both as an individual or via a limited company – it is unclear whether a lender would consider the landlord as having more than four mortgaged properties. The new rules propose that a landlord’s entire portfolio must be viable. Therefore, it is uncertain whether lenders may accept an application, if some properties within a portfolio are generating rental income in excess of mortgage payments and others are not; however the shortfalls on the latter properties, are covered by the other properties within the portfolio.
The new rules are part of the government’s crackdown on the buy-to-let market. However, these rules could have an adverse effect on first time buyers, as landlords could increase rents, making it difficult for buyers to save for a deposit.
Existing burdens on buy-to-let lending include the following:
- Since January 2017, lenders have been required to apply a stress test, to new mortgage applications, at a hypothetical interest rate.
- The former chancellor introduced the 3% stamp duty “surcharge” on purchases of additional properties.
- The former chancellor introduced a change in 2015, that will eventually remove landlords’ ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax. These changes are being phased in from 2017 and fully implemented by 2020. From April 6, only 75% of mortgage interest can be deducted against rental income to calculate profits. This decreases by 25% each year until none can be accounted for in the 2020-21 tax year. Tax will now be due on turnover, rather than profit. If mortgage rates rise, but rents don’t, landlords will be worse off. Some, landlords will have to pay all of their profit in tax, and then pay additional tax on top.
Tips for private landlords, with four or more mortgaged properties:
- Consider making mortgage applications before the new rules apply in September 2017.
- Consider the structure of ownership of buy-to-let properties – as an individual or as a limited company. Many landlords hold properties within a separate company which, unlike individual landlords, are not losing higher-rate tax relief on mortgage interest.
- Consider reviewing property portfolios.