The Telegraph: The buy-to-let mortgage trap that 'guarantees' you lose money
Posted on 23 November 2015 by
Lenders are selling buy-to-let mortgages where – all other factors remaining the same – borrowers will be losing money every month once the Government’s planned tax changes take effect.
Many lenders are aggressively expanding into buy-to-let, one of the fastest-growing parts of the mortgage market.
But they could be putting borrowers – and their own businesses – at risk, commentators warn, because their generous loan offers do not appear to factor in drastic tax increases due to apply to buy-to-let investors from 2017.
In an example, a higher-rate taxpayer with a £300,000 property and a £240,000 loan remortgages with Aldermore’s 3.99pc five-year fixed deal. He borrows the maximum amount permitted (80pc of the value) and has the minimum level of rental income the bank requires – 125pc of the monthly mortgage interest.
If his rental income of £1,000 a month remains steady, his annual after-tax profit of £1,440 today will be completely wiped out by 2019 thanks to the tax increases. By the time the tax changes are fully implemented in 2020, he will be making a loss of £480 a year.
Lenders appear to be counting on landlords to increase rents rapidly.
Ray Boulger, of mortgage broker John Charcol, said borrowers were being lured in by cheap rates without understanding the tax implications.
“Borrowers are banking on capital growth, which is unlikely to keep up the pace of recent years, and strong rental growth, which again is not guaranteed,” he said.
One major lender, Coventry Building Society, said it would be “fair” to count on increased rents and house prices. It expected its borrowers to generate positive cash flow even after 2020. Aldermore did not respond to requests for comment.
Falling mortgage rates
Since the tax changes were announced, buy-to-let mortgage rates have fallen considerably. The average two-year fixed rate has fallen from 3.39pc in July to 3.26pc and five-year fixed deals are down from 4.15pc to 4.06pc, according to data from Moneyfacts.co.uk.
Mr Hargreaves said lenders and brokers should be doing more to make borrowers aware of the tax risks before they take out a loan.
How is buy-to-let tax changing?
Landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.
In effect, the Chancellor wants to tax landlords on their turnover rather than profit, meaning that tax will be payable on nonexistent income. For some, tax rates will exceed 100pc. The change will be phased in from 2017 and fully implemented by 2020.
Smith & Williamson, the accountancy firm, has calculated that any higher-rate taxpayer landlord whose mortgage interest is 75pc or more of their rental income, net of other expenses, will see all of their returns wiped out by 2020.
For additional-rate (45pc) taxpayers, the threshold at which their investment returns are wiped out by the tax is when mortgage interest costs reach 68pc of rental income. Some current basic-rate taxpayers will also be hit, because the change will push them into the higher-rate tax bracket.
Many concerned landlords have written to their MPs to urge them to fight the change as the Finance Bill passes through Parliament. But they are finding little support.
Fiona Mactaggart, Labour MP for Slough, told a Telegraph reader, who is also a landlord and her constituent, that she thought “the plans to restrict support for buy-to-let are unlikely to be changed”.
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