There are many rules and regulations on leasing property as a residential landlord. These regulations can be difficult to understand and some may or may not affect you, depending on your business status. In previous years, options such as buy-to-let mortgages were a sure fire way to make significant profits from the rental market. With rising house prices and substantially more people renting than in previous generations, a buy-to-let option could be like an ideal investment opportunity.
From April 2017 there have been some significant changes to relief on finance costs in association with buy-to-let mortgages. These changes will be transitioned over the next four years but include tighter regulation on buy-to-let finance options and removal of tax relief, which for higher tax rate payers, will see the decrease from 45 per cent to a basic rate of 20 per cent.
Changes in finance regulation
At the start of 2017, the Bank of England introduced some tougher rules in regards to lending on buy-to-let properties. Subject to banking regulation, it now means anyone considering investing in this type of property and requiring finance, will need to show that the rental income of the property will cover the mortgage payments at a ratio of 145 per cent if interest rate were to increase by 5.5 per cent. This jump in ratio may mean landlords who want to move their current mortgage could face being stuck with their current rate, as they cannot provide the supporting evidence that the property could attain those rental amounts. This in turn may force landlords to increase rents, which may not appeal to potential renters or disgruntle current tenants.
Lower tax relief
Since April 2017 the Government began to decrease the tax relief for higher taxpayers from 45 per cent to the basic rate of 20 per cent. For landlords this significant change on tax relief could reduce profits, as this change will be looking at taxing landlords on total turnover from the property rather than the profits after costs. With the changes above, some landlords may struggle to move to other finance options.
There are a variety of alternatives to decrease the implications of these changes but it is advisable to speak to a business finance professional and seek expert information for your situation. Some examples include:
Consider setting up a limited company
The above changes don’t apply to furnished holiday lettings, UK-based companies and non-UK based companies. Setting up a limited company and transferring the property to this instead may be an option for you, as landlords will still be able to claim back finance expenses in full but the downside of transferring ownership includes high cost implications. This may be a suitable option for landlords looking to invest in additional buy-to-let properties but may prove costly moving your current portfolio.
Alternative financing solutions
As standard banking regulations have become tougher on landlord financing options, there is a selection of alternative finance solutions to consider. Options such as peer-to-peer lending and private lending streams aren’t governed by banking code and provide options of backing from private equity trusts and other sources. These options usually do not have such stringent rules and conformities, and offer a tailored finance option based on your circumstances and requirements.
Find out how Response Business Finance can help with Property Finance. Click here for more info: https://www.responsebusinessfinance.co.uk/property