Buy to Let Mortgages. What are lenders offering entering 2018?
Following tax changes and the stricter affordability checks imposed on personal BTL borrowing introduced last year compounded with the rise in base rate, it appeared as though 2017/18 was going to be a tough time for landlords. Confidence in the sector appears strong however and average interest rates have fallen over the last 12 months.
Whilst many landlords will be content to leave their portfolio as it is and take the hit on the tax, another option is to consider purchasing property through a limited company.
One factor is the new tax changes and how this will affect high rate tax payers in particular. From 6th April 2017 the way tax relief on mortgage interest & other finance costs is calculated was amended. The idea is to make it a level playing field for all landlords with higher rate and top rate tax payers seeing the amount of relief gradually reduced to bring them in line with basic rate tax payers at 20% (current basic rate tax). This site is not intended to provide tax advice and we would encourage all landlords to speak to their accountant or tax adviser if they are unsure of how the changes will affect them.
This is a significant change & based on a typical property with borrowing of £225k at a rate of 3.49% and rental income of £15k, this could reduce the net profit by around £1,500 p.a.
Many landlords are now looking to change the way they buy new properties as a result. With corporation tax at 20% this year and expected to reduce to 17% by 2020/21 there could be additional tax savings (it is important to seek professional advice on your tax situation and potential benefits).
As of December 2017, there were a total of 1,371 buy to let products available from 26 lenders. The number of products grew by over 200 in the last 12 months and on average 15 of the current lenders offer products suitable for limited companies. Many of these lenders offer the same interest rate for personal landlords or Special Purchase Vehicle (SPV) limited companies.
As the net profit is reducing for individuals, lenders have also been required to increase the income cover ratio from around 125% to 145% which has the effect of reducing the amount lenders will advance on low yield properties. Limited company ratios remain at 125% meaning lenders can be more generous in the loan to value ratio.
Finally, Interest rates. Although base rate increased from 0.25% to 0.5% in 2017, average BTL rates fell slightly with 5 year fixed average rate falling from 3.77% to 3.54% between January and December as a result of more competition and the increased number of products available. As the next base rate change is likely to be upwards it is highly likely that Buy to Let rates will also rise in coming months.
In summary, the recent changes have made BLT investment less attractive for some investors, however there are alternative solutions and the lenders in the sector are becoming more competitive month by month with more and more products suitable for limited company borrowing.
If you have any questions regarding buy to let borrowing please contact a member of the team on 01482 635400 or click here to leave your details and a member of the team will contact you