Landlords Face First Big Change to Lender Rental Coverage Calculation
29.04.16The Mortgage Works have become the first big lender to change their rental calculations for landlords looking to obtain a Buy To Let mortgage as a direct consequence of upcoming tax changes.
The Mortgage Works have upped their rental coverage requirement from 125% at an assumed rate of 4.99% for loans up to 65% Loan To Value, (LTV) or 5.49% for loans up to 75% LTV, to 145% coverage.
They have also restricted all loans to 75% LTV.
The tax changes effect the amount of rental income that can be offset against mortgage interest payments.
“From April 2020, tax relief for finance costs will be restricted to the basic rate of income tax, currently 20%. Relief will be given as a reduction in tax liability instead of a reduction to taxable rental income. This means taxable income will be derived from rental income (less allowable costs, not including mortgage costs) instead of gross profit.”
The changes will be phased in from April 2017, as the table below from The mortgage Works shows :-
|
Tax relief on finance cost
|
2016/17
|
2017/18
|
2018/19
|
2019/20
|
2020/21
|
|---|---|---|---|---|---|
|
Existing system
|
100%
|
75%
|
50%
|
25%
|
–
|
|
New system
|
–
|
25%
|
50%
|
75%
|
100%
|
Andrew Montlake, Director at Coreco Mortgage Brokers commented, “This shows that lenders are starting to worry about how recent tax changes will affect landlords’ income in the future.
“I suspect they will not be the last to change their rental calculations with this in mind and landlords should review their portfolio and financing requirements sooner rather than later, as well as making sure they are aware of the very real effects these tax changes will have on their future income.
“The worry is that this will hit not just landlords, but tenants too in the form of higher rental payments at a time when many are already stretched”.
Written by Andrew Montlake
Andrew Montlake, better known as Monty, began his journey with an Hons degree in Economics & Politics before starting in the mortgage industry in February 1994. His journey started at John Charcol where he became part of the top-performing team before moving on to Cobalt Capital. In April 2009, Monty became one of the main founding directors of Coreco, determined to help drive financial literacy, educate the public and show that mortgage brokers can be different. Monty is also a proud Board Member of the Association of Mortgage Intermediaries, (AMI) and has recently been elected as their Chairman from 2021.
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