How will the new tax breaks on buy-to-let mortgages affect you?
Experts say there are two million buy-to-let landlords in Britain all of which could see at least 50% of their profits disappear by George Osbornes recent hammering of mortgage tax breaks in his most recent budget. This has come as a slight surprise to the industry. It is stated he will cut the tax relief from 40% to 20% by April 2017 which may have a devastating impact on a large amount of buy-to-let investors and on the industry itself.
To put this into context an investor with a £100,000 buy-to-let mortgage on a property worth £150,000 is likely to see their annual net profit drop from £1,620 a year to just £780. This is according to estimates made by a number of high street lenders.
However, that is just an estimate, the hit could be even harder depending on the buy-to-let mortgage the investor is currently on. Experts forecast that in the worst possible circumstances once agents fees have been paid for managing the properties all the net profit could disappear. If this is the case the consequences could be huge.
George Osbornes changes may make the yield generated from renting a property out worse than leaving the money in the bank. This would have been unthinkable 12 months ago given the rate of interest banks are currently offering based on the base rate been at 0.5%, the lowest it has ever been.
Ray Boulger from the mortgage broker John Charcol gave an example highlighting this concern. Think of a £200,000 house purchase. If the house buyer puts down £80,000 as the deposit. With the new tax plans the annual return after tax would be 0.6%. Although this is slightly higher than base rate there are still savings accounts paying 3% interest (equal to 1.8% a year for a higher-rate taxpayer).
Set up a Limited Company
You do have the option to set up a Limited Company to avoid paying the tax. However, before you make this decision think about how you will access the finance to buy further property as there are few lenders in the market willing to lend to LTD companies. They may also be alternative tax issues to consider. There is also the possibility to shift the ownership to your spouse who may be in a lower tax bracket. Before you make any of these decisions seek financial advice.
Will rents Rise to compensate?
If the chancellor’s new structure is implemented there is a mixed view on what will happen to the rental market itself. Betsy Dillner, director of campaign group Generation Rent, says: “Because of the housing shortage, landlords are already charging the highest rents they can get away with, so the market won’t bear any attempt to push them up any further.”
However, one of Britain’s most well-known Landlord Fergus Wilson suggests rents will go up. “The reduction in tax relief is effectively an increase in my mortgage payment, but direct to Mr Taxman rather than the lender. It will put some intended buy-to-let investors off completely, but the large investor will take it in his stride and I suspect it will drive rents upwards to compensate.
“It will always be a case of supply and demand, and with an ever-increasing volume of tenants the rent will go up. There is only one answer to the country’s problem and that is to build more houses.
What if I have no option but to sell?
A large amount of buy-to-let investors solely rely on the net profit from their port-folio to live on and if this disappears they may have no option to sell some of their port-folio to generate some revenue. If the worst comes to the worst and certain investors have to sell their properties there are a number of options for them. They could employ their local agent to sell the property. However, if cash is tight then this may not be the solution. It is a lot easier to sell a property without a sitting tenant. Therefore before the property is marketed it would be wise to give the tenant notice. However, it is a vicious circle because once the tenant leaves the rent obviously stops, but the mortgage doesn’t. Selling a property with a local agent can take months.
You can sell your house today
If you cannot afford to subsidise one of your properties for months and you need to sell it then there is an industry that may help. There are a number of companies that offer to buy any house whatever its condition or location. Granted you may not achieve the price the estate agent may market your property for. However, you will still have the peace of mind you have a buyer for the house, and there is no risk of the property been down-valued as the buyer will be a cash buyer and not reliant on a mortgage.