Nearly two-thirds (6%) of applicants were unaware of either the changes to mortgage tax relief or MCD. This lack of awareness rises to 71% amongst ‘accidental landlords’, namely those who rent out property due to unforeseen circumstances such as being unable to sell, or inheriting a home.
Mortgage advisers estimate that accidental landlords account for approximately one in six (17%) new mortgage applications, with overall buy-to-let mortgage applications growing by 29% in the past year.
The research also revealed that only 7% of mortgage advisers believe that the MCD will have a positive impact on approvals of buy-to-let mortgage applications, compared to 59% who expect it to have a negative impact. The EU’s MCD could see circumstances where landlord mortgage lending will be viewed as “consumer” lending and could be subject to more stringent lending criteria. Accidental landlords with one or two rental properties may not be able to pass the expected new affordability tests.
Changes to the mortgage tax relief are set to be phased in from April 2017 with landlords no longer able to deduct mortgage interest payments before calculating their tax bill. They will instead get a tax credit equivalent to 20% basic-rate tax on this amount. Landlords are also set to be hit from April 2016 by stamp duty changes that mean anyone buying a second home or buy-to-let property will pay a 3% surcharge on their stamp duty bill.
Nick Breton, Head of Direct Line for Business, said:
“The new EU legislation on mortgages coupled with the Government’s increase in buy-to-let taxation could significantly alter the buy-to-let market, so we would encourage any mortgage applicants to think carefully about the new law and how this could impact them as a landlord.
“With house prices in the UK rising by 7% in the year leading to October 20152, and with the estimated average deposit standing at more than £61,0003, it is imperative that landlords are able to maintain a suitable amount of property to house the population of young people saving up to buy their first property, or those seeking a temporary stay in a town or city.”
With the new legislation set to be phased in between 2017 and 2020, Direct Line for Business is providing landlords looking to protect their income with the following tips:
• Get good insurance cover – as well as covering the building and its contents, landlord insurance can also cover the landlord’s liability and loss of rent following an insured event such as a fire or flood. The average rental cost is £739pcm4 so not having the right cover in place could have a significant impact on your finances, especially if the property is uninhabitable for a period of time while repairs are taking place.
• Secure tenants for less – letting and management agents currently charge between 10 and 15 per cent of the monthly rent in fees. If you have time and are prepared to take on the responsibility of finding tenants, making sure you are following all the correct procedures and managing your properties yourself, you could save more than £1,000 per year. If you rent a property privately you can also claim back the cost of advertising, credit checking, referencing, deposit protection and professional inventory costs
• Make the most of existing tax benefits – Any money spent on keeping a property in a good state of repair is tax deductible, as are all broker and arrangement fees. You can also claim the whole cost of council tax or utility bills that a tenant would pay
• Keep up to date with legislation – It is important to continually keep an eye on the policies affecting landlords to ensure that a property complies with the latest legislative changes. It is also important to consider whether a property is not just affordable in the short term but in the medium to longer term as often relief is phased out and additional taxes phased in over a number of years.
