AToM exhibited at the Property Investor and Homebuyers show at the London ExCel last weekend. It was a great opportunity to talk to professional landlords, as well as those looking to make their first steps in to the buy to let sector.
With many changes and increases in taxation on profits being introduced over the next few years, the Buy to Let sector has taken quite a beating! Yet with interest rates so low and demand for rented properties increasing, and no clearly defined solution to help first time buyers, I can’t see these changes killing off the buy to let sector just yet!
In fact, the exhibition showed how many people were genuinely interested in looking at renting out property as a long-term investment and project.
There’s a lot of confusion still regarding buy to lets and how lenders look at affordability.
So, to try and clarify – Since the Prudential Regulation Authority stress test rules came in to effect in 2017, lenders have to work out affordability based on the rental income achievable from the property and stress the product term over a five year period, often at 145% of a nominal rate of 5.5%.
Lenders interpret the rules differently and differentiate between a buy to let in a personal name compared to a property brought in a limited company name.
However, if the lender offers a fixed rate over a five year period, the actual pay rate can often be used, instead of the nominal rate of 5.5%.
Therefore, by way of example – A standard buy to let in a personal name, achieving a rent of £950 per month, with the calculations of 145% of 5.5%, would equate to a loan of £142,946
If we used the same example, but in a limited company name, the calculation changes to 125% of 5.5%. A rent of £950 pm would now equate to £165,818
If we then look at the same examples, but on a five-year fixed rate, the changes in loan achievable become very apparent:
145% of 3.49% (Personal name & 5 year fixed) – a rent of £950 pm = £225,274
125% of 3.49% (Limited Co & 5 year fixed) – a rent of £950 pm = £253,333
Please note that these are examples only and every case is looked at on its own merits
With all of the recent tax changes on Buy to Lets, you should now seek professional mortgage advice, along with in-depth tax advice from an accountant who understands property, limited companies and all the new rules surrounding landlords and, where applicable, portfolio landlords.