Buy-to-let mortgages have been in the news a lot lately. Seen by many landlords in the last few years as a great investment opportunity.
Recent changes to buy-to-let tax relief have now left a number of individual landlords wondering whether it’s worth it. Yet renting still remains an attractive option for some house-hunters, and buy-to-let can still be a sensible investment opportunity for landlords.
Limited companies are not affected by the changes to mortgage interest tax relief, and many landlords are now setting up limited companies to own the properties they rent out. So, is this a good idea?
Yes … and no. It really depends on your personal circumstances. Let’s look at some of the main pros and cons:
Advantages
- Higher tax relief – under current legislation, limited companies will pay less tax than individual landlords
- Dividends – you can potentially take up to £5,000 as tax-free dividend income
- No income tax when investing profits to acquire further properties – corporation tax is about half the higher income tax rate
- Personal funds can be drawn back out of the company – for example, mortgage deposits could be drawn back by way of a director’s loan
Disadvantages
- No Capital Gains Tax allowance on sales – individuals can benefit from a Capital Gains Tax allowance (currently £11,100) when they sell a property
- Additional costs – running a limited company incurs extra costs, such as accounts preparation and filing
- Higher mortgage rates – many lenders charge companies more than they charge individual borrowers
- Less choice – fewer lenders offer mortgages to companies
Transferring existing properties from individual ownership to a limited company can be complex and costly; but it can be done.
Much depends on your current circumstances and your future ambitions. The best thing to do – as with any mortgage issue – is to seek professional advice.
James
BB Mortgages provides specialist buy-to-let mortgage advice to landlords. For advice, call us on Newark 01636 674455
A. Interest rates and mortgages have been in the news a lot recently. The Bank of England has reduced interest rates to a record low of 0.25%, and even hinted at the possibility of a further cut. So, is this a good time to fix for longer than the usual two years?
Historically, two year fixed rates were the norm, but five years is now more common and some lenders are launching seven and even 10year fixed deals, with attractive rates.
If you are in a stable situation relationship, job, house then a longer term fixed rate does make sense. But you wouldn’t want to break a 10year fixed rate and incur an early repayment charge, as this would be costly (although you can transfer the mortgage to a new house if you sell).
Over the past six months, 91% of our clients have opted for a fixed rate mortgage, most on two year terms. It’s worth bearing in mind that when you come to review your two year fixed rate, may be around the time that the UK is actually leaving the EU.
Nobody knows what impact that will have on the economy and interest rates, and that’s why some people may prefer to choose a longer term fixed rate, and enjoy the peace of mind that comes with it.
If you’re buying a home with a smaller deposit, it may be worth considering a short term fixed rate. As your equity grows (known as the loan to value or LTV) the lender’s risk profile reduces, and they will generally offer you cheaper rates. So, even if interest rates increase, you can offset this by securing a lower rate, reflecting that reduced risk.
If you feel five years is too short, but 10 years is too long, there is now another option. So far, 32 seven year fixed rate products have been launched (compared to only a handful five years ago) and these are a good middle ground.
The other solution, of course, is a tracker or variable mortgage, which may follow the Bank of England base rate. But, although interest rates could fall again, they could also increase as we approach the EU departure date. Be mindful that rates could go up or down. Much depends on your circumstances and attitude to risk. The best course of action is to seek independent advice.
James
BB Mortgages helps scores of self-employed people find a mortgage each year. For advice, call us on Newark 01636 674455
A. The answer to this question is most definitely yes. But (and you knew there was a but coming, didn’t you?) lenders are a little stricter with self-employed applications. It frustrates me when I hear that lenders haven’t been helpful to a self-employed applicant; something which is often mentioned in the media. Like anything in life, it helps to be armed with some knowledge.
Some key points to note for self-employed mortgage applicants are:
- You must have your documents in order. The majority of lenders will require your tax calculation (also known as an ‘SA302’) for the last three years. This can be ordered from your accountant, HM Revenue and Customs or from the HMRC website. In short, this is a summary of your self-employed income, net profit or dividends and salary, if you are a limited company
- Most lenders will then take an average of the last two years’ income. However, some lenders will take the most recent year’s income and others have individual ways of looking at your income
- There are some lenders in the market that will accept you if you have only been self-employed for one year, instead of the usual two or three years
If you are self-employed, the most important thing to do is talk to a mortgage broker before you find a property. They will help you fully understand what paperwork is required and how different lenders will assess your income. That will give you an idea of what’s achievable.
So, the good news is that there are lots of mortgage options out there for home-movers, people looking to remortgage, first-time buyers and investors. It just requires good knowledge of each lender’s self-employed criteria and a little patience to negotiate the lender’s underwriting procedures.
I hope this helpful to anyone who is self-employed and looking for a mortgage.
James
BB Mortgages helps scores of self-employed people find a mortgage each year. For advice, call us on Newark 01636 674455
