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It’s not easy being a landlord in 2019. The government has increased stamp duty on buy-to-let properties to prohibitive levels, making portfolio expansion extremely costly; tax reliefs for which landlords were previously eligible are currently in the process of being phased out, making portfolio profitability an increasingly elusive goal; and the ban on tenancy fees has just come into effect – yet another policy innovation expected to fall disproportionately upon the shoulders of landlords.
Though such policy changes are challenging the viability of the buy-to-let proposition, there are still plenty of options available to landlords looking to defend the profitability of their portfolios. These options may demand a little more effort and savvy, but they promise to offset many of the difficulties that have arisen as a result of recent governmental policy changes. Throughout this article, we will discuss a number of these options, considering the pros and cons involved, and looking at the increasingly prominent role lenders are playing in keeping the buy-to-let market alive and healthy.
In the past, landlords were only required to pay income tax on net rental income, after allowable expenses such as mortgage interest had been deducted. However, since April 2017, a number of changes have been gradually introduced that are eating away at the profits of many landlords.
As of April 2020, when the changes will come into full effect, interest payments will not be classed as an allowable expense and will therefore no longer be deducted from rental income when calculating total taxable income. Instead, landlords will pay income tax on their total rental income minus allowable expenses (not including interest payments) and will then be able to claim a tax relief worth 20% of their total mortgage interest payments. What all of this means, in essence, is that landlords currently paying the basic rate of income tax will be relatively unaffected by the changes – unless, that is, they are pushed into the higher tax-bracket due to the changes in accounting methods – while those paying higher or additional rate income tax will be significantly worse off.
Such changes have left many landlords looking for ways to rearrange their portfolios so as to remain profitable. One popular option has been for them to structure themselves as limited companies rather than as individuals. Buying property via a limited company comes with one significant benefit: landlords are not subject to the tax relief changes discussed above. Instead, they are free to deduct their mortgage interest payments from their total rental income and then pay corporation tax on this net amount.
But even this option comes with a number of drawbacks: for one, set-up costs may prove sufficiently large to deter small-portfolio landlords from pursuing this course of action. In addition, if landlords wish to remove profits from their companies, they will find their income drained away by a number of other forms of tax – for example, dividends tax – potentially defeating the whole purpose of restructuring.
In the past, the decision to purchase property through a limited company structure may have presented a range of mortgage-related difficulties, as only a small, specialist group of lenders were willing to offer mortgages to such legal entities. But since the announcement of the removal of this tax relief, there has been a proliferation of mortgage products made available for landlords looking to purchase buy-to-let properties through a limited company structure. There’s no reason, therefore, that landlords choosing to purchase their properties through limited company structures should face any unique difficulty when attempting to secure a mortgage, just due to the nature of this specialist style of lending they can expect to pay a slight premium in terms of rates and fees.
Another option that remains open to landlords looking to retain their full mortgage interest tax relief comes in the form of holiday buy-to-lets. Such properties are completely exempt from the aforementioned tax relief changes, and so present a viable alternative to standard, residential BTLs. Moreover, when considered on a week-by-week basis, holiday lets command significantly higher rents than do their residential equivalents, presenting another compelling reason for landlords to consider this option. That being said, if holiday lets are not occupied, they will not produce income. The onus is therefore on landlords to ensure that their properties are constantly working in their favour. This will require more effort and acumen than would the running of a standard residential BTL, but the potential returns to be reaped should be sufficiently large as to generously compensate such efforts.
Houses in Multiple Occupation (HMOs)
In addition to looking for ways to hold onto their tax reliefs, many landlords are also looking for new strategies by which to maximise the rental yields of their properties. One way they are choosing to do this is by turning their attention from standard BTL properties to houses in multiple occupation (HMOs). According to a recent piece of research released by Leeds Building Society, HMOs command an average rental yield of 6.9%; this was the highest average rental yield of any property type included in the study. As a result of such findings, many landlords are either electing to convert their existing properties into HMOs, or else showing a preference for HMOs over other property types when engaging in portfolio expansion.
But in addition to the complications and considerations entailed by standard BTL mortgages, there are a number of additional considerations involved exclusively in HMO property finance. As was once the case with limited company property ownership, it was previously quite difficult for aspiring HMO landlords to acquire the finance they needed in order to purchase their desired HMO. Lenders could – and can still be – highly discriminative with regards to the type of HMO they were willing to lend on: specifically, they were concerned with the number of tenants, the types of tenant, and the value and location of the property. Moreover, many lenders were only willing to lend to applicants who already had a certain amount of experience as landlords. This meant that many applicants that showed every indication of becoming highly successful HMO landlords were summarily rejected on account of their lack of experience.
The difference between then and now is that the number of HMO mortgages available on the market – and therefore the range of HMO mortgages available on the market – has exploded over recent years, as lenders sought to accommodate the evolving financial needs of landlords. While lenders today are often just as exacting as they ever were, the increased range of products available in this market space has meant that it is often possible, with enough industry knowledge, to locate the lenders on the market that will be willing to lend to a landlord, with their unique circumstances and requirements. By enlisting the help of a good broker many such landlords will find that they are able to secure precisely the mortgage that they require.
Commercial and semi-commercial property present another option to landlords looking for an alternative to residential property. Such property presents a superior investment opportunity compared with residential property in a number of ways: firstly, because the 3% stamp-duty surcharge does not apply to commercial property, so portfolio expansion can be achieved without landlords incurring crippling stamp-duty bills. Additionally, due to the higher levels of risk involved, commercial and semi-commercial properties typically come with higher rental yields than do residential properties, making them an enticing alternative for landlords looking to sustain the profitability of their portfolios amidst the raft of deleterious regulation changes being thrown their way.
A number of specialist lenders have recently introduced short-term products specifically designed to provide landlords with the funds they need to refurbish their properties before they are rented out. Such refurbishments allow landlords not only to boost the capital value of their properties, but also to maximise the rental yields that their properties bring. Having made such refurbishments, landlords can then move onto standard buy-to-let mortgages and reap the rewards that these increased rental yields confer, and perhaps draw out some of their invested monies for their next project.
Since April 2017, the buy-to-let landscape has become increasingly inhospitable to landlords looking to turn a profit and build their property portfolios. But while traditional property-letting may be less viable than it once was, there are still myriad options open to landlords that are willing to diverge from the beaten-track of standard buy-to-let property ownership. Throughout this article, we discussed a number of these options, touching on limited companies, Holiday BTLs, HMOs, commercial properties, and refurbishments as potential means of defending the profitability of one’s portfolio.
There’s no denying that the buy-to-let sector is a less accommodating place for investors than it once was. But while the government seems to be doing everything in its power to compound the problems faced by landlords, lenders are working tirelessly to provide landlords with the financial tools they need in order to remain afloat. The truth of this statement was evinced by a recent report released by Moneyfacts which found that the number of buy-to-let mortgage products currently available on the market is at its highest level in twelve years.
On balance, this increased diversity of product is surely a boon to landlords, providing them with solutions to problems that were previously deemed unsolvable. But with great variety comes the potential for great confusion, which is why it is imperative now more than ever that landlords seek out the advice of a qualified mortgage consultant, who will be able to bridge the information gap that exists between lenders and borrowers, and provide landlords with the assistance that they need in order to confidently navigate this increasingly complex terrain.
If you are a landlord – or are thinking about becoming one – and would like to discuss these mortgage options with one of our qualified mortgage advisers, you can arrange an obligation-free consultation by calling us on 02073172820 or by emailing us at firstname.lastname@example.org.
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