Oct

How buy to let lending has changed

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From 30th September, a regulatory change means that all buy to let mortgage lenders have to adjust the way they underwrite mortgages for landlords with four or more mortgaged rental properties. These landlords will be known as “portfolio landlords”.

The last few years have been a transitional time for buy to let, with the portfolio landlord regulations representing the latest change to the rules governing this sector.

Leeds Building Society explains how buy to let has changed in the last few years.

This article is intended as a summary only and does not constitute legal or financial advice. No reliance should be placed on this guide. We recommend that you seek independent legal advice and/or financial advice if you have any questions or queries.

Stamp duty: April 2016

Before April 2016, Stamp Duty Land Tax (known as stamp duty) was paid as a flat percentage of the price of the property you were buying, as long as the property was worth at least £125,000.

But since April 2016, changes to stamp duty have meant you pay more stamp duty when you’re buying an additional property – which means any property that isn’t your main residence.

This means most buy to let landlords now have to pay higher stamp duty fees when buying their rental properties.

Wear and tear allowance: April 2016

April 2016 also saw changes to wear and tear allowance. Previously, buy to let landlords had been able to deduct 10% of their profits from their tax calculations as “wear and tear allowance”. But the new changes have meant that landlords can only claim back the costs they have actually incurred to replace furnishings, appliances and kitchenware.

For many buy to let landlords, this means a higher tax bill than they would have faced before the change were made.

Prudential Regulation Authority (PRA) affordability standards: January 2017

From January 2017, lenders have had to take into account any tax liability, including tax relief and all property-related costs, when assessing affordability for buy to let.

Because of this, many lenders increased their Interest Coverage Ratios (ICRs) and stress rates, meaning some landlords may find it more difficult to secure new finance.

Mortgage interest tax relief: April 2017

In April 2017, new rules were introduced around mortgage interest tax relief for buy to let landlords. Previously, buy to let landlords could deduct all of their mortgage interest from their profits, which meant they could reduce the amount they were taxed.

But these changes reduce the percentage of mortgage interest that’s tax deductible. It’s happening gradually over the next few years, ending in 2020, when the maximum amount of mortgage interest that can be offset will be 20%.

Portfolio lending: September 2017

On 30th September, mortgage lenders will have to change the way they underwrite buy to let mortgage applications for buy to let landlords with four or more properties. These landlords will become known as “portfolio landlords”.

With these changes, we’re likely to see some lenders stop accepting buy to let applications from portfolio landlords, while others will embrace the changes and tailor their offerings to better meet the needs of this type of borrower.

Portfolio landlords probably won’t notice much difference in the application process. They might be asked for a bit more documentation, and the application process might take a little longer, but the noticeable changes should otherwise be fairly minimal.