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Limited company borrowing the way forward for buy to let landlords

An overview of the specialist buy to let lending market post-stamp duty deadline. What is business like now and what does the future hold? Gavin Richardson, Chief Operating Officer at Mortgages for Business gives his assessment.

Like mainstream buy to let, the specialist buy to let sector has been busy of late and we were pleasantly surprised by the continuing activity of the professional landlord in April.

We continue to see a sharp increase in the use of limited companies for purchasing rental property as landlords take tax advice and realise either the advantages of incorporation or look to mitigate their personal tax liabilities. We are also seeing some landlords move some of their existing, personally owned stock into limited companies, despite the costs involved.

The majority of transfers of this type are treated as a sale so incur stamp duty and refinance costs and are subject to capital gains tax, as well as the costs of incorporation.

Any new lender entrants to the specialist buy to let lending sector will need to have a limited company offering. Those that don’t will have completely misunderstood the direction in which the market is heading…

Foundation Home Loans and Keystone Property Finance – both specialist BTL lenders – have recently announced their intention to up stress tests for individual borrowers to 145% whilst keeping to the existing 125% calculation for limited companies which will not be affected by the pending tax restrictions.

Both FHL and Keystone have introduced a caveat to this rule such that individual borrowers who can demonstrate they are now and are likely to remain basic rate tax payers, may request the lower stress test.

I expect more lenders to follow suit and amend their rent to interest ratios in the days ahead, especially after the Prudential Regulation Authority’s Consultation Paper 11/16 closes on 29th June 2016. The regulators will be watching closely any lender that doesn’t. 

Here at Mortgages for Business, we are of the opinion that 145% is only the start and we could see the figure rise further for higher and high rate tax individuals by the time we get to 2020.

In April, The Mortgage Works was the first mainstream buy to let lender to up its rental calculation to 145%. Since then Barclays has also revised its stress test up from 135% to 145% of rental income.

More complex property types such as HMOs, multi-units and flats above commercial continue to be popular purchase choices for landlords due to the consistently strong yields.

In the last Complex Buy to Let Index, published by Mortgages for Business, average gross yields for HMOs once again topped the 10% mark, and multi-units were averaging 7.8% compared to just (just?) 5.8% on standard BTL property.

The PRA is seeking to establish a standard definition of a portfolio landlord as one that has four or more properties, and that specialist underwriting processes should be used on them because they pose a greater risk. Apparently it has data to show that there is an increase in rates of arrears for portfolio landlords.

You could argue however, that portfolio landlords are much less of a risk than those with fewer properties.

Portfolio landlords are more experienced and perhaps more importantly, void periods become less of a problem because proportionally, the loss of income on one property is less onerous on a portfolio landlord than on a landlord with 1-3 properties.

We’re are also seeing a slight uplift in mixed use purchases, particularly where office to residential conversions can be carried out. Classed as commercial, these properties don’t attract the stamp duty surcharge or the interest offset reductions in future years. If you are looking for finance in this regard, we have direct access to the specialist lenders which have a good appetite for this type of property.

As the EU Referendum draws closer, I anticipate landlords will hold back somewhat from further investment until the results are known.

I fully expect the UK to stay in the EU because a majority will be keen to maintain the status quo. A vote to remain will keep rates low for some time whereas a Brexit could mean prices start to rise. And no landlord or tenant wants that.

As always, if you are looking for property finance, Mortgages for Business can help. Call today on 0345 345 6788.


You may also be interested in:

Keystone Property Finance to introduce split stress tests

FHL to increase buy to let stress test for individuals

Barclays to increase rental coverage ratio from 135 to 145 per cent

Why The Mortgage Works was right to increase its income cover ratio