How Buy To Let Changes Will Impact Lending
The changes to stamp duty and how interest can be set off against income were all well publicised and have been common discussion points between landlords and their accountants.
However it may be that the real impact on buy to let lending is not in the legislative changes but in how these changes will be treated by lenders.
Let me explain things a little more.
Lenders Existing Buy To Let Book
Historically lenders have used a basic rent coverage ratio to calculate loan affordability, the typical ratios have been 120% or 125% rent to cost cover. The ratio has worked pretty well, however everything has now changed.
With the full interest charged on buy to let loans now unable to be set off against tax, there is a need for more income to cover loan cost.
It is a pretty simple change for lenders to make, until you start to consider the loans already advanced.
The greatest concern for any lender is what they don’t yet know. With buy to let lending the unknown is how the increase in tax will impact affordability. In effect every property now needs to generate more income to remain constant.
There is an expectation that lenders will move their criteria as the impact of the tax changes start to be seen. This could see cover ratios rise or loan to value ratios come down.
Non Cash Deposit Purchases
This one is the side effect of landlords wanting to move properties out of their personal name and into a limited company to benefit from corporation tax over personal tax rates.
The expectation is that properties will be moved into limited company names. This means that the mortgage finance is moved into the limited company, the transaction being a company purchase where there is no cash deposit.
Typically a lender will advance up to a percentage of the property value with the balance being made up in cash. The lender will ask for various evidence including where the cash stake is coming from, which creates a problem when there is no cash deposit.
The Solution For Buy To Let
There are solutions available despite all the new challenges of both taxation and ownership. What it does mean is that the lenders may change and where you obtain your mortgage may change, but there are still loads of options.
The decision for landlords now needs to be more decisive. Rather than just work on a multiplier of rent to justify affordability there needs to be some accountancy input to ownership structure and net income.
More work, but the lending options remain.
If you have any comments about this post then please get in touch. If you want to know more about who is lending in this sector then just ask.
By Dave Farmer