A quick guide on buy-to-let changes and what to consider before committing to an investment property.
Fears the buy-to-let boom could threaten the stability of the wider economy if it turned to bust have led both the Chancellor of the Exchequer and The Bank of England to take action.
Today new measures come into force aimed at putting the brakes on the buy-to-let market by increasing stamp duty and restricting bank lending.
Head of Residential Property Samantha Blackburn answers key questions frequently asked by clients about the new changes and offers a checklist of factors to consider before purchasing a buy-to-let property.
1. When do the buy-to-let tax rules come into force?
These will come into effect on Friday (April 1) for anyone buying a second home. They will now pay a three percentage point surcharge on stamp duty.
2. What are the new rules for lenders?
The Bank of England’s new guidelines do not change the tax situation for buy-to-let properties and are about making sure borrowers can afford a mortgage on a second home.
The Bank will now ask all lenders to ensure that all the costs that come with renting out a property are taken into account in assessing affordability and that any tax due on a purchase be added into the calculation, as well as the size of the borrower’s personal income and personal debts.
3. How long will it be before banks implement these rules?
A consultation has begun with lending banks that will end in July. After this it will a month or two before the rules formally come into effect.
Bank of England has ascertained that all lenders will be expected to apply with the new standards as soon as possible.
4. What is the Bank of England worried about?
Buy-to-let lending has been on the Bank’s risk radar for some time. Officials are targeting the riskiest lending to individuals with the greatest number of properties and largest debts.
The concern is that when the market turns and rates rise a large number of houses could all come on to the market at the same time exacerbating the downward spiral. By encouraging banks to cut back risk now, officials hope to limit the scale of any crash.
5. What happens to banks that don’t comply?
If a lender were to ignore the rules and carry on underwriting mortgages based on laxer standards they could be in big trouble. In behind-the-scenes briefings, the Bank made it clear that a lender that deliberately flouted its guidance would be subject to a full investigation that could lead to it being put into special measures.
Here is a checklist of things to consider before committing to a buy-to-let property:
- Consider carefully the area that you are buying in to ensure that there is a rental market there
- Keep your options open it may be that in a particular area small family homes will have more rental potential than say a one bedroom flat
- Speak to your tax advisers as there will be implications around tax and mortgage payments as well as the return you make
- Remember to factor into your costs the potentially higher rate SDLT if you already own a property
- Consider that as a landlord you are under obligations to repair the property and before you rent it out ensure it is in effect safe so there will be upfront and ongoing costs to consider
Samantha Blackburn is a property lawyer at Slater and Gordon in Manchester, specialising in all areas of commercial and residential property law.
If you have a legal question regarding property and tenancy agreements contact the property team at Slater and Gordon on freephone 0800 223 0768 or contact us online and we will call you.