THE buy to let mortgage market boomed as many investors, unhappy with near zero returns on their cash, moved to buy a property to provide themselves with a sustainable income.
Many used a mortgage to top up their purchase, but with the new government’s ever changing goalposts, borrowers are being crippled with a frightening financial imprisonment.
These new goalposts mean landlords will be walloped with a so called ‘tenant tax’ where landlords will have to pay an additional 20 per cent of their annual mortgage interest to the Inland Revenue.
Whilst some may not have much sympathy for a ‘landlord’, many of these are single home-owners trying to make their cash work for them. The ‘big’ landlord you are concerned about won’t have a mortgage. Indeed one estate agent confirmed that January’s figures showed 61 per cent of buy to let purchases were in cash.
Consider however any new cost has to go somewhere. That will either be in the form of falling house prices as landlords sell up, or increased rents to name just two obvious outcomes.
Indeed the Council of Mortgage Lenders has already noticed drop of one third in mortgage approvals year on year from last year and it is expected by the council of mortgage lenders that the £40 billion market may well reduce to £30 billion by 2018.
Those landlords who haven’t exited the buy to let market are now faced with numerous increasing costs, none greater perhaps than the financial imprisonment of not being able to move their mortgage from their current provider.
In a bizarre twist, the Prudential Regulation Authority has increased tougher stress testing on landlords which prohibits many from being able to refinance, and of course, because the existing lender knows their borrower is handcuffed, they remain highly uncompetitive when the landlord reaches the end of any deal they are borrowing on. It is quite staggering.
For example, just this morning our mortgage department looked at a landlord who was offered a two year fixed rate deal at 3.29 per cent for his £175,000 mortgage, which would cost him £480 per month.
After scouting all the mortgage deals on the market, he found a lender who offered a deal at 2.05 per cent, which resulted in a payment of £299 per month – a saving of £2,172 per year.
Specialist lenders have seen what is happening and have stepped in to alter how they look at a buy to let mortgage and on what basis they would lend.
For example, three years ago a buy to let lender would offer a mortgage based on the rent payable on the property, so a £1,000 per month property would allow mortgage borrowing of £190,000. This has now been reduced to £150,000 based on the new tax regime and stress testing, which blocks landlords from refinancing.
The new specialist lenders, however, are looking at things differently and allowing a landlord’s personal affordability to come into play, so they look, correctly, at the ability to pay, rather than a straight-forward matrix of ‘the computer says no’.
The savings dwarf the impact of the tax but it is all very possible that the ‘single house landlord’ (ie who isn’t the professional) will pop along two years after these tax changes with the 2019 tax return to find the double whammy of the increased tax charge, plus the fact they have missed out on the best deals available.
It becomes even more alarming when you look at the range of mortgage options available on the high street for the buy to let lender, and how easily a landlord might be duped out of thousands.
Another application I’ve just looked at showed the difference between the best two-year fixed rate available for a 75 per cent mortgage which came in at 1.94 per cent with the worst at 3.84 per cent. The difference to a landlord with a £180,000 mortgage is a shocking £3,420 per year.
:: Peter McGahan is the owner of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a question on your buy to let mortgage or would like a free list of the best buy to let mortgages call Darren McKeever on 028 6863 2692, email dmckeever@wwfp.net or visit us on www.wwfp.net.
