Are CHL’s mortgage terms reasonable or even legal?

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Over the last 18 months I have had to point out to many of my consultancy clients that CHL “Capital Homeloans” are the only lender we are aware of which specifically prohibits the transfer of beneficial interest in their mortgage T&C’s.

This causes a major headache when if comes to tax planning strategies which rely on the use of Declarations of Trust.

I always make this clear to clients who have mortgages with CHL and point out that whilst the Declaration of Trust is completely invisible to anybody unless you declare it, the risk is that if a lender with such conditions in their T&C’s was to find out that technically you would be in default. However, there is no history of CHL or any other lender having ever called a loan in on this basis. Nor has there ever been a Court case where a lender has been granted possession or appointed LPA receivers for a breach of such conditions. Given that all conveyancing solicitors have at some point implemented Declarations of Trust you have to wonder why this is?

This also makes me wonder CHL’s conditions precluding the transfer of beneficial interest are reasonable or even legal.

What business is it of a mortgage lender who gets the benefit of capital appreciation and rental profits if it has no effect on their security whatsoever?

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Headline Mortgage Rates for Limited Companies

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Limited Company BTL mortgages are now available up to 85% LTV and rates start from 3.09%.

The buy-to-let market has been hit by numerous tax changes in the last couple of years. Two of the main ones being:

1. the introduction of a 3% Stamp Duty surcharge
2. Until April of this year private landlords could deduct both mortgage interest and other allowable costs, from their rental income before calculating the amount of tax due.

The restrictions on finance cost relief in particular has created a substantial increase in demand for Limited Company BTLs, which in turn has increased the number of lenders and products that are available for this market and this has caused a welcome reduction in the mortgage rates.

Before considering embarking on a purchase or re-mortgage in a Limited Company, the various Pro’s and Con’s should be considered:

Pros 

• From 2017 to 2020, the amount of Buy to let tax relief that individual landlords can claim back will be cut from 45% to 20% for top rate taxpayers. This change does not affect Limited Companies.
• The first £5,000 of dividends is tax free, though this is likely to be reduced to £2,000.
• No income tax is payable when reinvesting profits to purchase further properties, although corporation tax is payable on trading profits.
• Limited Liability. If the company is dissolved then personal assets are protected (unless guarantees or other security is given)
• Properties within Limited Companies benefit from indexation allowances for the purpose of calculating capital gains whereas individuals get no such relief
• Incorporation relief can re-set the clock in terms of capital gains by washing them all into the value of shares created at the point of incorporation. Therefore, if the company was to sell a property the day after it acquired it there would be no tax to pay because there would be no capital gain. The historical capital gains on properties transferred into the company will only ever be paid if the shares in the company are sold. Once you die, any capital gains rolled into the shares dies too.

Cons

• No personal Capital Gains Tax (CGT) allowance when the company sells a property
• Transferring properties that are already owned by an individual into a Limited Company may be considered as a sale and purchase and may trigger a capital gains tax, stamp duty and re-mortgaging costs. Relief is available to mitigate these but only in certain circumstances. Seek professional guidance from Property118 on this point

The above is only an outline and professional advice should be taken for a competent commercial broker and specialist tax adviser.

As mentioned, the popularity of Limited Company BTLs has increased dramatically and this has increased the number of providers and products which has pushed down the costs, a trend that is quite likely to continue.

The differential in terms rates and LTVs for individuals and companies is narrowing on an ongoing basis.

In my next articles I will be looking at alternatives to traditional mortgage funding so please watch out for that.

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Instant Conveyancing Quote

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• Competitive and instant fixed fee conveyancing quotes
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• A team that will help you work with the right solicitor for your case
• No hidden charges or unknown extras
• Buyer Protection insures you for up to £2250 in your conveyancing , survey and mortgage fees should the property fall through
• All solicitors are regulated by the same service level agreement to ensure a consistent conveyancing service
• Support 24/7 from The Moving Hub

Click Here for a conveyancing quote

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Generation Rent are more reliant than ever on the PRS

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A survey carried out by LetBritain of 2000 UK adults shows that 39% are financial unable to purchase the home they would like and are reliant on the Private Rental Sector (PRS) to meet their needs.

In London this jumps to a whopping 49% who are unable to purchase, because of the disparity in house prices.

In a bizarre twist opposed to government policy, 27% of adults renting said they were looking to purchase a Buy to Let property to get on the housing ladder. In London 42% of renters said they would consider purchasing a Buy to Let in more affordable areas of the country.

61% of those surveyed said they blamed the government for not doing enough to help Generation Rent and 64% said they could only see the situation getting worse in the next five years.

LetBritain CEO, Fareed Nabir, added “With more and more people across the UK coming to rely on the private rental sector, the results of the research are concerning. Whilst many renters are working hard to enter the property market, they clearly do not feel the government understands the issues faced by tenants.”

“Interestingly, the findings show that Generation Rent is now increasingly looking to buy properties outside of their chosen place of residence so they can still get onto the property ladder without having to sacrifice the location or quality of the property they wish to live in.”

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We Should Be Using Net Rental Yields

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I have just responded to a Facebook post by axe the tenant tax, the post was about landlords losing confidence with rental profits. The article ended with the fact that rental yields are holding up at 6% I have done some calculations and would like those good at the maths to make comment or provide alternative figures. I believe that net rental profits are down to average of 2%

Too much talk about rental yields that are gross figures ie 6%, due to the recent government taxes we should now quote net yield for greater accurately. Paying tax has now become a cost of doing business due to the loss of interest as an expense.

I did a calculation based on an average property price of £190,000, average rent of £850 per month, average loan of 60%, average interest rate of 4.5%, average running costs which included full management or an employed team for the larger landlord like myself of which costs 30% of the rent if you do your figures right, I allocated 5% of the rent for capital improvements or to go into a sinking fund for long term improvements.

The figures I came out with were that 25% of the rent goes to the tax man, 25% pays the interest on loans, 5% to the sinking fund, 30% to running costs (which includes repairs, administration costs, management for all new rules and regulations), this left 15% after tax profit for the landlord.

Now at £850 per month that’s £10,200 per year and 15% of that = £1,530 after tax profit per year.

Now let’s forget the capital appreciation because no one includes that in working out the yields, capital employed and put into the purchase of the property is 40% of £190,000 = £76,000 and the return on investment for £1,530 after tax rent on our cash investment of £76,000 = 2.01%

So big difference from the quoted figures of 6%

Any one any comments.

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