Over the next 24 months there will be many property investors who have investment property mortgages coming due for renewal. The challenge will be twofold;
- Does the rental income still stack up given the changes in affordability testing?
- Do the changes in taxation of investment property still make the property worthwhile?
For many property investors they will have to face these two challenges and decide what to do. The most important thing is to begin addressing and making decisions much earlier, if you have a mortgage due sometime in the next 12 months then now may be the time to explore options.
Rental Income Ratios
This is the first thing to decide. The rental income ratios have changed to be far more conservative, the PRA ask lenders to seek a greater level of rental to loan cost cover for all unincorporated borrowers. As a guide this means that;
- Rental income for unincorporated borrowers needs to exceed loan costs (at a stressed level of interest) by 145%
- The same ratio for company borrowers is typically 125%
The reason that the same proposal is judged differently between personal and company borrowers is largely down to regulation, with limited company lending being unregulated.
This means that landlords need to consider the ownership of their portfolios from a tax and funding perspective. There will be situations where mortgage borrowing comes up for renewal with it fitting under company parameters but not in personal names.
If landlords are considering changing the ownership of any property then it will take time and require good tax advice, give yourself that time and start planning early.
Is It Still Viable?
The second option is the decision over whether the property remains worthwhile keeping. In that case there are a few options open;
- Pay Down Borrowing. Currently, for a 40% taxpayer, the net of tax cost of interest on a 4% mortgage is just 2.4%, under the new rules the net of tax cost will be 3.2%, so you may prefer to pay down the mortgage using savings to reduce the impact of the changes
- Sell. If you have properties you know will be loss making after tax then you may consider selling them. Be aware that there could be capital gains tax to pay and that the reduced rates of capital gains tax announced in the 2016 budget do not apply to sales of Buy to let (BTL) properties, meaning that gains will still be taxed at 18% and 28%
- Spousal Transfer. If the new rules mean that one spouse will have to pay tax at 40% on rental profits, you might be able to save tax by transferring property to a basic rate tax paying spouse. There is no capital gains tax on inter spouse transfers so there would be no tax cost of the transfer
- Transfer to Company Ownership. Be aware that there are accountancy costs of using a company, you will need to publish accounts and undertake returns to Companies House. If your plan is to retain profits within the company or reinvest in further property, using a company will save you money. However, the transfer of properties to a company is a disposal at market value so there could be capital gains tax to pay if the properties have increased in value since purchase
Whichever route you go down you will need to give yourself time to get things in order so whatever you choose to do, don’t leave it to the last minute. If you are unsure if there is a renewal or break clause in your loan agreement then get in touch and we can check it for you free and let you know.
The availability of buy to let and investment property mortgages remains, it just needs a little more consideration of the wider issues before making a decision.
By Dave Farmer
Thank you to Carpenter Box for some of the research on this post. If you have any questions or want to talk through any mortgage renewal then please get in touch.
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