If you took out a buy to let mortgage on your rental properties between 2014 and 2016 then you may soon be having issues with paying tax.
Research investigating the tax changes for buy-to-let landlords in the UK have found that landlords will be unable to service their loans by using the income generated from rent.
This report was generated by S&P Global Ratings, and they found that about 60% of the buy to let loans from this time period will basically become lossmaking because the higher tax rate relief on the interest on mortgages is being phased out over the next 3 years.
There are many different causes of the increased risk for those taking out loans in this time period, making them extra susceptible to these tax changes and interest rises.
Alastair Bigley and Feliciano Pereira are credit analysts, and they believe that because these loans were taken out during a period of low interest rates, and they may have missed out on the inflation of rental income. This has left them with little to no cashflow to deal with the extra tax costs.
Most of these tax changes will not be felt in their full effect until we reach 2020, where the aim is to reduce the after tax profitability of buy to let mortgages, with an average deduction of around 21%. This comes are the UK is facing a housing crisis of its own, particularly in rich London boroughs, where wealthy individuals are purchasing homes for long term investments without any interest of living within them.
People who managed to secure loans before the main financial crash of 2008 are in a much better position to succeed, because they invested during high interest rate times so their projections of profitability are far more accurate assessments than those who invested later. This was linked to the use of no deposit mortgages with banks lending to ever more vulnerable individuals who couldn’t afford the repayments.
There was also a significant increase in rents gained through properties in London during this period, with average rent increasing by almost 36% since 2007 (according to the ONS).
There are some events that have baffled even the experts at the S&P, including the quick fire sale of many investment properties, which is causing house prices to fall across the country.
Those thinking of refinancing or changing their investment have been hit with even more penalties since April of 2016, when stamp duty and buy-to-let homes were given a 3% stamp duty surcharge.