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Is Buy-To-Let Dead? John Charcol Responds

John Charcol on Buy-to-Let Lending

Nick Morrey, Mortgage Technical Manager from John Charcol, answers your questions on the buy-to-let market:

Now that the effects of the stamp duty surcharge, Section 24 and PRA regulated have percolated into the marketplace, how would you say the Buy-to-let lending space has responded?

Buy-to-let investors have responded in various ways. Landlords who only want up to three Buy-to-lets are either selling up (especially with the phased withdrawal of the mortgage interest relief on income tax) or just holding on to what they have got – they are not really increasing their portfolios at all.

Those that are a professional landlord initially stopped purchasing property from May 2016 (when the additional stamp duty came in) and then there was very little activity for about a whole year.

Now they have been getting specialist tax advice as buying in a Limited Company (rather in their own personal names) is becoming more attractive.

Also, they have been looking at property types with higher rental yields such as holiday lets, homes with multiple occupancy and Airbnb.

Is ‘Buy-to-let dead’, as some (largely attention-seeking) commentators like to affirm?  How would you envisage the growth of lending to this sector over the next 5 years?

Buy-to-let is definitely not dead.

Lenders have worked hard over the last three years to improve their options for Buy-to-let mortgages including top-slicing of income, more Limited Company products, more generous affordability stress tests for applicants using 5-year fixed rates, and more lenders looking to accept holiday lets and Airbnb.

As a result, the lending is there for landlords and they are taking advantage of it.

We have seen a decline in numbers as some landlords have indeed sold up and exited the market. But as London prices have fallen – opportunities have risen and as landlords turn their eye further away from the capital growth areas such as Manchester, Birmingham and some university towns.

These of which have seen price rises partly fuelled by increased buy-to-let activity.

Since property is an asset-backed investment with the UK a finite area and housebuilding still behind necessary levels the idea of using property as an investment will continue to be popular, if less lucrative nowadays.

Somewhat related to the above, how do you feel a possible ‘no deal’ Brexit could impact both Buy-to-let and mortgage lending as a whole?  It would be interesting to hear your thoughts on the impact that PM Boris Johnson could have on both the property and mortgage lending market as a whole.

Part of a ‘No Deal’ Brexit is the budget the PM Boris Johnson is looking to call for early October 2019. If that happens and if he enacts a stamp duty change (0% on the first £500k) and if that change is also for Buy-to-let/second homes, then I predict an increase in rental property acquisitions.

That is a lot of ‘ifs’ though and only time will tell. That said, people will need somewhere to live irrespective of whether we are in Europe or not. In periods of great uncertainty prices of property do tend to fall.

Given that most landlords are not directly impacted on our inclusion to the European Union, I can see that they may well act on low prices and start a buying spree for when things settle and hopefully prices return to normal.

What proportion of your Buy-to-let borrower clients is now using Limited Company lending? 

Probably around 40% of Buy-to-let lending we do is on a Limited Company basis. But please note that a fair bit of John Charcol’s current Buy-to-let business in personal names is actually product transfers with existing lenders.

How are the pay rates currently and are there particular any lenders to look out for? 

Buy-to-let rates are pretty much the lowest we have ever seen them but more to the point, the difference between Buy-to-let and residential rates has never been less.

In years gone by, Buy-to-let products were noticeably more expensive than residential but not so much nowadays – this is partly due to new entrants over the last seven years or so.

Lenders of note for various reasons – Foundation, Fleet, The Mortgage Works and Birmingham Midshires. Not all of those listed do Limited Company Buy-to-let yet, but that list of lenders is growing.

Would you be able to highlight what are the core benefits of following the Limited Company route as opposed to borrowing in one’s personal name? 

Buying in Limited Company means you still pay stamp duty at the higher rates, but as it is a company buying them – the rent is treated as revenue for the company, which is taxed differently.

With a Limited Company, the revenue (rent) is gross income from which you can deduct business expenses (upkeep of the properties being a significant cost) and the cost of finance within the business (mainly the monthly mortgage interest payments).

Those costs can be significant and if they can be offset against the rent, then the tax due is likely to be somewhat lower than for those owned personally where the mortgage interest offsetting has nearly been phased out.

You can leave money in the Limited Company, not pay tax on it but then once there is enough in there you can go out and buy another property maybe. This is potentially a good route to portfolio growth.

Lastly, if you are looking to create wealth for your family’s future then as you do not own the properties you can add shareholders to the company in preparation for intergenerational succession.  If your property/properties are just in your name, then they could form part of your estate for inheritance tax purposes and some may have to be sold to clear debts and inheritance tax.

As always – people looking to plan to avoid future taxation of any kind should seek independent qualified advice.

What would be your recommendations on how Limited Company borrowers can best prepare themselves to secure lending in the fastest / most-efficient way possible?

Easily – see an independent mortgage broker the moment you think you might need a buy-to-let mortgage and consider securing the services of an accountant preferably with property tax experience. The earlier in the process that you receive advice, then the smoother an experience your purchase process will be.

Are there many lenders out there at the moment that allow borrowers to bypass the 6-month rule?

The 6-month ownership rule was initially put in place by the Council of Mortgage Lenders to make it harder for distressed sales to take place. There are lenders who will allow that but if the client says upfront that they want to ‘flip’ the property then the broker should be looking at development finance.

What they should not be doing is claiming that the borrower wants a longer-term knowing full well that the intention is to flip. What has reduced somewhat is the number of buy-to-let products with no early repayment charge, which negates much of the attractiveness for not using development finance.”

How popular are the bridge to let products at the moment?  Would be great to hear your thoughts on the pros and cons of moving forward with this type of borrowing (in comparison, for example, to looking for a standard bridging product and then seeking to refinance once a property is refurbished). 

Bridge-to-let is just a term for pairing a bridging product with a buy-to-let product with the same lender. Precise have been doing that for years but most lenders who offer both bridging/development finance and have a buy-to-let offering will allow it.

The tricky part for a good broker is to weigh up what the cost to the client is going to be for doing both forms of borrowing with the same lender or for picking separate lenders as this could work out cheaper – but more admin will be required.

As an example, as a market broker like ourselves, we would look at both options and discuss with the client. Unfortunately, we don’t have any statistics on this particular type of product but if time was short for a borrower and they are happy to be potentially paying more to use one lender for both borrowings then they certainly have their place in the market.

About the Guest Blogger

John Charcol have plenty of experience of working closely with Limited Company mortgage providers. For over 40 years they’ve combined their expert staff and access to the whole market to allow them to offer impartial advice and support to help guide you through the finance options available to you as a Limited Company.

Visit their website – www.charcol.co.uk/mortgages/best-buys/buy-to-let/ – to compare Limited company mortgage rates or you can call to book your free consultation 03717 052 806.

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October 2019

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