Buy to let

Buy to Let

The growth in the market is quite tremendous coupled with the growing competition from lenders, helping the supply of BTL mortgages to stay ahead of the game. To fit the bill for borrowing, lenders require at least £20,000 to £25,000 as earned income; additionally, the borrower must be between 25 to 75 years old and also fall into any of these classes:

•    Employed

•    Self-employed

•    Retired with a pension


First-time buyers are not under the consideration of lenders.  Their rates are higher than the owner-occupier mortgages because of the higher risk that the lender has to face. Similarly, arrangement fees rate also takes a similar approach, including early repayment charges. Lenders currently require between 20-25% deposits with the credit evaluated for affordability in connection to the Rental Cover Ratio (part of the home loan that is covered by rent) which can be as high as 145%. A few lenders are utilizing a much higher expected future rate.



With a requirement of a £200,000 mortgage, the lender would require a rental pay of £1,450 p/m. This is determined by accepting that the rate is 6% and the lender requires 145% gross rent of mortgage costs:

£200,000 x 6% = £12,000 yearly mortgage cost

£12,000/a year = £1,000 pm mortgage installment

£1,000 x 145% = £1,450 pm rental salary.



Buy to Let Regulation

Consumer Buy to Let Mortgage Regime: If the mortgage is in line with the criteria put down by the Consumer Buy to Let mortgage, the affordability will be surveyed according to owner-occupier borrowing in connection with affordability and suitability. CBTL mortgages have been managed under the FCA MCOB rules since March 2016 and secured by the Financial Ombudsman Service (FOS) and Financial Services Compensation Scheme (FSCS). Borrowers can put aside the CBTL protection and borrow by acting as an investor. This will enable the borrower to utilize potential lease for affordability purposes. However, they will have to forfeit the protection.


Prudential Regulation Authorities Supervisory Statement

 In line with the Prudential Regulation Authorities (PRA’s), supervisory proclamation which is now regarded as stricter underwriting standard is a must for the lender offering BTL mortgages. According to PRA, Investment BTL is a property that is bought explicitly and entirely for rental purposes and is a UK private property which makes it impossible for the borrower to live therein. Properties prohibited in this case are:

  • Corporate lending (loans to LTD Companies)
  • Existing borrowers seeking “consent to let.”
  • BTL contracts not up to a one year term
  • Existing BTL customers re-mortgaging (provided the loan size is the same as the current balance)

Prudential Regulation Authority Buy to Let Mortgage Regime

CeMAP 1 covered UK regulation, which emphasised the need for financial intermediaries to be authorised and regulated. To recap, regulation covers the two main areas that consumers are vulnerable to when engaging with financial firms: Prudential Risk and Conduct of Business Risk.  Prudential Regulation imposes standards that require firms to hold sufficient capital and control risks to avoid defaulting on their obligations through insolvency. Conduct of Business Regulation looks at how a firm conducts its business about the sales and marketing of financial products and services with its customers. The Prudential Regulation Authority (PRA) has the main responsibility to authorise and regulate deposit takers; these include banks and building societies.

CeMAP 1 has the UK regulation under its coverage, which stressed the essence of financial intermediaries to be approved and be under regulation.  As a summary, regulation deal with the two major areas that consumers seem to expose when dealing with financial firms. These are Prudential Risk and Conduct of Business Risk.

Prudential Regulation creates standards that enable the firm to have adequate capital and control risks to abstain from defaulting on their commitments through indebtedness. For Conduct of Business Regulation, it is more concerned about how a firm carries out its operation in connection to the sales and marketing with its customers. The Prudential Regulation Authority (PRA) has the primary duty to approve and control deposit takers; on this list are banks and building societies.

With PRA exercising its primary obligation as it concerns the financial soundness of lenders, it then becomes necessary for the body to raise the alarm in light of the investment BTL market,  known in 2016 as “underwriting standards for Buy to Let mortgage contracts.” The body was worried at the level of exposure of individual investors and lenders towards the market and its impact with an increase in rate. Implementation of higher standards have taken place that incorporates new affordability tests for BTL mortgages; a typical situation is a customer with four plus properties; lenders must come up with stricter checks and evaluate their experience.

Since January 2017, new guidelines have been introduced. Since September 2017, an income affordability test and other requirements became operational. Lenders must put into consideration, the borrower’s viable property portfolio. According to the new rule, in a situation where the loss from property income is covered by the profit from other properties, the whole portfolio may not be profitable. Lenders are to check the following with the new guidelines:

Is there a need for the borrower to supplement the mortgage using their income?

 The following applies from 2017 by lenders:

  • Interest Coverage Ratio (ICR)
  • Income Affordability Test
  • Interest Rate Affordability Stress Test

Interest Coverage Ratio (ICR):  It is estimated as the rental income to mortgage, including related running expenses and also the tax the borrower paid. The ICR is dictated by every lender and should be consequent on rental demand and rent levels in the area approved by a certified surveyor. Different strategies to approve the rent can incorporate an automated valuation model or a current rental agreement.

 There is an excess of 145% in rental cover ratios. This translates to 145% of mortgage costs. It is now a requirement for lenders to check if borrower’s rental income can cover mortgage repayment by a ratio of 145% using the interest rates of 5% minimum.

Income Affordability Test: If there is a need for personal income to support the mortgage, a complete affordability test will need to be introduced. Incomes from all sources must be analyzed as well as rent and other investments and fewer taxes. The expenditure will depend on FCAMCOB rules categories—basic essential and quality of life expenditure. Flexibility will be exercised by the lender to a High Net Work (HNW) client.



Interest Rate Affordability Stress Test:  It is importance that lenders  put into consideration rising interest rate relative to mortgage affordability. Again, potential increases in the interest rate for the next five years must be a subject of concern too– except you’re dealing with a fixed mortgage or mortgage term is below five years.

Refinancing Risk is another subject to factor in at the end of the special deal. The market expectation of interest rate increase will be a course for concern when the potential rate rise is assessed via Financial Policy Committee (FPC) indications. There is an increase of 2%, which is the minimum more than the current rate, using a 5.5% minimum rate—in case 2% plus the current rate is lowers than 5.5%.

Government Changes affecting Buy to Let

The BLT market is getting the government’s attention. A large number of people who seem to be vulnerable to rising interest rate own a considerable amount of debt. These kinds of people are also feeling the impact on reducing the supply of housing for first-time buyers. The reliant on rent by borrowers are putting BTL mortgages at risk for the lender. Void rental period and bad tenant impacts on affordability. To this effect, the government has introduced a new measure as regards taxation, which is causing BTL investing to be less attractive. The following measures were put in place:



Stamp Duty Land Tax (SDLT):  A 3% surcharge will apply for stamp duty on BTL’s and second properties. This will happen on top of all brands with a purchase of property worth over £40,000, which makes them costly to buy.

Wear and tear allowance:  Wear and tear allowance will be applied from 6th April 2016 for landlords holding furnished properties. This would be against the actual cost of replacing the furnishings. Offsetting of cost can only be done once.

Capital gains tax (CGT): About the income tax band, CGT is payable at 18% or 28% on a disposal.NET gain and BRT payer will attract 18% while 28% is for HRT and ART taxpayer. These will particularly become more expensive on disposal with an 8% surcharge going higher than the standard rates.

Reduced Interest Rate allowance:  Decreaseinterest  on mortgage cost experienced a shift in April 2017. It will come in stages for the next three years. Using the old rules, 75% of rental income will go under assessment. For 2018 and 2019, it will be 50% and 25%. The new rule will come to play in 2019 with a reduction to BRT (20%) on tax relief on mortgage interest. Interest paid on loan will be deducted in whole from both rent and tax that is applied on net income using the investor’s highest marginal rate. This only applies based on the old rules.  20% will become deductible on loan interest, which comes as a relief.


 Rory rental property entitled him to get  £18,000 P/A as rental income. He operates an interest-only mortgage on the property with a mortgage interest payment of £13,000 p/a. Rory is an HRT payer. In line with previous rules, he pays tax as follows:

  • Receives Rental income of £18,000 which is below mortgage interest of £13,000, leaving £5,000 net income. 40% taxation applies on net income amounting to £2,000 income tax–40% of £5,000

Calculation of Rory’s rental income will have to happen differently. Income tax will be connected to rental turnover, as opposed to net rental pay. This will prompt a modest BRT payer property investor turning into an HRT payer with the gross inclusion net to their pay. Other allowable expense can be deducted by investors who are against their property income. The formula is represented as follows:

Rory still gets rental pay of £18,000 P/A; the home loan interest is £13,000 P/A. It is revealed using this calculation:

40% tax of £18,000 = £7,200

20% of £13,000 loan interest = £2,600 as allowance

£7,200 subtracted from £2,600 relief gives a tax bill of £4,600—£2,600 above what is obtainable before now. Interests will be cleared out if loan rates rise and the rent cannot be expanded to take care of the cost.

What to Consider when investing in Buy to Let

 Investing in property is considered a long-term asset-backed venture. It is a geared venture that consists of borrowing and the dependence on occupants to pay a loan. It is liable to capital risk in that property costs may fall and the investor may experience loss in cash. Most of Buy to Let mortgages go with an interest only, which requires the investor to sell the property for repayment of capital toward the end of the term. This is a possible risk that the property might be less than the loan when the mortgage ends.

Buy to Let investors are supposed to carry out their research before purchasing a property. Location is of prime importance; some areas filled with rental properties, which make it hard to get tenants. Properties that possess great amenities have more prominent interest, and the kind of property will determine if the property is perfect for families or single people. Investors should put into consideration the demand for rent; the tenancy will be “assured shorthold tenancy agreement” with the viability of property purchase check.

Buy to Let Property within a Special Purpose Vehicle (SPV)

 At the point when an individual purchases a BTL, they are obligated for a loan. Tax imposition by the government (effective by 2020) in regards to rental income is causing several investors to turn to Special Purpose Vehicles (SPV’s) as an option in contrast to holding property directly.

An SPV is organized as a limited company and stands alone like a legal entity. The investor is the shareholder and the SPV is the legal owner of the property. The shares belong to the investor, but the property is not his ownership directly. It will be liable to company taxation being a limited company with the primary advantage of enabling the investor to counterbalance full interest against the rent.


Benefits of an SPV

  • Even without the transfer of property, shares of the SPV can be moved to another holder
  • Stamp Duty Reserve Tax (SDRT) at 5% when transferred; it is critical to SPV shares when purchased.  This is opposed to the 3% surcharge included in higher Stamp Duty Land Tax (SDLT) rates.
  • A greater number of costs can be claimed than individual landlords for tax reasons.
  • The SPV can hold a range of properties.
  • Shareholders of the SPV are not at risk for debts, except if they have given personal assurances.
  • Full interest rates relief on rental income and may be requested by an SPV; the new standards do not influence SPV’S
  • By 2020 corporate tax will decline to 17% from 19%. Taxation on rental income is done once within the company.
  • No need paying out dividend and salary.

Drawbacks of an SPV

  • Only a handful of lenders offer loans to SPV’s.
  • Mortgage costs increase with more checks from the lender.
  • Company law comes to play for a limited company and has to come up with stricter organization accounts.
  • Personal guarantees may be needed by the limited status of SPV from directors who would be put at risk for the loans.
  • 19% of corporate tax applies to capital gains and rental income; annual allowance is not relevant in this case. Shareholders are held responsible for the sale of their shares even though they could utilize their CGT annual allowance.
  • In the purchase of a property within SPV, BTL property taxes apply.
  • Payment of property taxes will apply in the transfer of existing property into an SPV.
  • To transfer current BTL into SPV, you have to make payment for Capital gains Tax on net gain.
  • With the director receiving his salary, employer and employee will have to pay personal income tax and national insurance
  • At zero tax is the first £2,000 when dividends are paid; BRT will be tax at 7.5%, HRT will be 32.5% while ART taxpayer will be 38.1%
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