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Buy-to-Let: Multi-Property Owners Face Future Squeeze

According to the Financial Times, starting September all financial institutions issuing loans to those with four or more buy-to-let properties will have to review their portfolio.

This is said to be partly because mortgage arrears tend to be higher with landlords who own more properties.

This change will mean fewer loans being made available to multi-property owners, but some experts believe that specialist lenders such as Aldermore and Paragon will fill the financing gaps and lessen the impact on the buy-to-let market.

These new Bank of England rules will also require lenders to apply ‘stress tests’ on loans at 5.5% interest rates and ensure a rental cover of at least 125% on mortgage repayments. Some lenders are already asking for a higher cover of 145%.

Birmingham Midshires, a subsidiary of Lloyds Banking Group, recently announced a change to its lending terms. It is increasing the rental cover from the standard industry rate on new loans to those in the higher and upper-rate tax band. Earlier this year, Barclays and the Mortgage Works, a Nationwide subsidiary, increased their rental cover rates from 125% to 135 and 145% respectively.

Landlords will no longer be able to offset all interest on their mortgages against their tax bills, which will now be based on gross rental income, less a 20% rebate on mortgage interest. This means that more buy-to-let investors will be in higher-rate tax brackets, doubling their effective bill and making tax payable even on annual losses.


Structural Defects Insurance

Concerns have been expressed that the change will harm tenants in the form of increased rents. Leading estate agent Savills predicted that reduced activity in the buy-to-let market could increase rental prices by as much as a fifth over the next five years. Higher demand for rental properties, driven by affordability issues, could boost rents by close to 19%.

In April a stamp duty surcharge was applied on second home owners, adding 3% to the tax charge for those investing in property. A 10% maintenance charge deductible from annual income tax was also eliminated, forcing landlords to claim instead for specific expenses. To complicate matters further, landlords who do not use a company structure to build their portfolio will be unable to offset their mortgage interest from their tax bill.

An estimated 700 landlords promptly launched a legal challenge against that change to the tradition rule, saying it undermined commercial taxation principles. Their bid for a judicial review was eventually thrown out.

High-demand areas, such as London, will consequently face a dwindling supply of rental properties as demand outstrips supply.

For awhile, it appeared as if the buy-to-let sector was bouncing back from April’s punitive tax reforms. Purchases by would-be landlords crashed after the major rise in stamp duty on second homes as experts warned that tax changes yet to come would absorb profits for second homeowners. Then Rightmove representatives reported a 30% increase in enquiries from prospective investors between June and September, but recent news may slow the momentum.

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