Budget 2015 Interest Tax Deduction Landords - Analysis of impact

cells

Graham_Devon wrote: »

Reading on that property118 forum they appear to be spitting feathers. There also seem to be quite a few of them that are stating they will be bankrupt as a result of these changes.

It appears those who will be hit hardest are those who have gambled, more than invested. it's quite an eye opener to read that some of these landlords are making less than £20 profit a month from their houses. That's simply insane. But their plan was always capital appreciation.

Capital appreciation is a gamble itself, but some appear to have exposed themselves to crippling debts in order to take that gamble. How did they even get hold of such debts? I thought the banks were being cautious now?

Others don't seem to be having much of an impact at all. So as an outsider to all of this I'm interested in how for some it will see them bankrupt (apparently) though others it will hardly make any difference at all to them.

If your mortgage interest and fees are low or non existent (you own outright) the impact wont be huge for everyone else they will be significant

I suspect one of the problems for some of the folk over at 118 are that they are on very poor deals. A lot of the competitive BTL mortgage lenders only offer a certain number of mortgages. For example BM-Solutions (part of lloyds i think) only offers 3 BTL mortgages so you cant go to them for a fourth or fifth mortgage. So if you have a bunch of BTLs say 20 of them then a good lot of them will likely be on quite poor deals (high fees and high interest rates)

I think overall the fact that it is phased in slowly will allow HPI and rent price inflation to allow landlords to go onto lower LTV bands and rents to increase so that they wont be out on the streets. They will make less money but it will be positive

The more important factor long term is that this will lead to a slow shift in rentals being held by sole traders (individuals) to being held by corporates. There are good and bad points about the. The biggest good is probably that the sector will be a lot more professional and the biggest bad point is that it will eat into owner homes.

phlash

Interesting points Cells.

danothy

I thought it was against the rules to post links to blogs your are involved with ...

Conrad

cells wrote: »

You don't need to look at individuals you can look at houses.

£500k house with 5% yield bought with a 25% down 3.5% mortgage £2,000 fee on a two year fix

Annually:
£25,000 rent
-£14,125 in interest and mortgage fees
-£2,500 void and tenant finding fees
-£1,000 other
= £7,375 profit
£4,425 net profit after tax @40%

After the interest is not a cost farce
£25,000 rent
-£2,500 void and tenant finding
-£1,000 other
Tax on £21.5k @ 40% = £8,600
Tax credit on £14,125 to muddy the water @ 20% = £2,825
-£14,125 interest and fees

Total post tax = £1,600


So in this example if you are already a higher rate payer you go from a post tax profit of £4,425 to £1,600 which is a huge drop.

I have replaced a third of my income with buy to let's, and this will be above halve my income by year end.

Your example is nothing like my own reality whereby even yesterday I let a flat I'm about to complete on, and the numbers end up with an income profit of nearly £500 pm even with a 70% 5 yr fixed mortgage. The lenders fee was added to the loan and really a nothingness in practical terms, just a small cost in the great scheme of rapidly rising capital appreciation.

I will probably always have a mortgage on this and on remortgaging incur more fees but as these are added they are not a real world cost that has any personal impact. One day when I die that £10k of costs can come out of the estate, so what.

The flat cost be £145 k and I agreed £850 pm rent yesterday.

My next project is either two more of these or a large HMOS which would net £1500 pm but is more intensive of course.

I increase rents on the button every year. If costs generally escalate then so will rents.

Conrad

Thrugelmere, many predicted a mass B2l exodus as the last crash befell us. The herd in fact stayed the course. You will not see a mass exodus if costs rise some, people will instead pay down some debt, increase rents and so on.mpeople just don't pack in thier life's work easily.

In any event if a meaningful proportion did exit, that restricts supply and pushes up rents.

Generali, the risk is comfortable. Even if a tenant goes into arrears, the vast majority of LLs cope, and in my long experience good Lls rarely if ever get any. You always own the asset, far less risky than shares or opening a franchise.

Imagine a very serious proper global recession. Equities could become worthless, people would turn to real assets and basic needs not bits of paper. I have ISAs and pensions but I would not like to think one day I was reliant on them.

chucknorris

Conrad wrote: »

Thrugelmere, many predicted a mass B2l exodus as the last crash befell us. The herd in fact stayed the course. You will not see a mass exodus if costs rise some, people will instead pay down some debt, increase rents and so on.mpeople just don't pack in thier life's work easily.

In any event if a meaningful proportion did exit, that restricts supply and pushes up rents.

Generali, the risk is comfortable. Even if a tenant goes into arrears, the vast majority of LLs cope, and in my long experience good Lls rarely if ever get any. You always own the asset, far less risky than shares or opening a franchise.

Imagine a very serious proper global recession. Equities could become worthless, people would turn to real assets and basic needs not bits of paper. I have ISAs and pensions but I would not like to think one day I was reliant on them.

I don't think that they will be a 'mass' exodus, I think new entrants will almost certainly decline a fair bit and there will be some that leave the market. But the I think the decline will be gradual as those who leave the market is only slightly increased but new entrants to the market will decrease.

Thrugelmir

Conrad wrote: »

Thrugelmere, many predicted a mass B2l exodus as the last crash befell us. The herd in fact stayed the course. You will not see a mass exodus if costs rise some, people will instead pay down some debt, increase rents and so on.mpeople just don't pack in thier life's work easily.

Did I? Don't recall it. The herd is staying the course. Though one wonders if they are looking at the jumps that lie ahead. Paying down debt and increasing rents sounds so easy. Doubt that the majority of amateur LL's have any form of structured planned route exit. Then it will be too late. May not lose any money but the returns won't have been worth the effort.

BobQ

This is well argued but very contrived to show what the author wants to show. I think this says it all....

For a landlord with no borrowing, think either of the super rich or super cautious, then there is no tax consequences on these landlords because they have no Interest Expenses. That means, this is very definitely not a tax change on the highest earners. The riskier you are as a landlord (the proportionately more debt you have, i.e. higher Loan to Value mortgages) the more you will pay in tax. It's therefore a tax change on the Risk Takers

You could say the Government is using the tax system to deter people from small scale property speculation using other people's money.

The idea that a landlord without any borrowing is super rich or super cautious is absurd and presumes that all BTL landlords are deliberately setting out to make a profit. I would say that many let a property purely to reduce costs, perhaps as an alternative to leaving it empty for a few years or because they enter a relationship and want to have the option of easily returning to living alone. Since when has paying off your debts been super cautious?

cells

Conrad wrote: »

I have replaced a third of my income with buy to let's, and this will be above halve my income by year end.

Your example is nothing like my own reality whereby even yesterday I let a flat I'm about to complete on, and the numbers end up with an income profit of nearly £500 pm even with a 70% 5 yr fixed mortgage. The lenders fee was added to the loan and really a nothingness in practical terms, just a small cost in the great scheme of rapidly rising capital appreciation.

I will probably always have a mortgage on this and on remortgaging incur more fees but as these are added they are not a real world cost that has any personal impact. One day when I die that £10k of costs can come out of the estate, so what.

The flat cost be £145 k and I agreed £850 pm rent yesterday.

My next project is either two more of these or a large HMOS which would net £1500 pm but is more intensive of course.

I increase rents on the button every year. If costs generally escalate then so will rents.

Thats a good yield my example was of a London home/flat where yields are lower

Using your example

£145k purchase
£102k loan
£4k interest a year
£1k other costs
£10,200 income @ 95% occupancy rate

Gives a monthly surplus before tax of £390 or £312 after 20% tax (£234 after 40% tax)

post tax changes however that goes down to £168 per month after taxes.


also what you will find is that as you buy more properties the most competitive mortgages are no longer available to you. so for example RBS is very competitive last time I checked but after 4 BTLS they wont give you any more and you need to go to the nex lender whos prices are a bit higher.


also important is the president this has set. the remaining 20% of finance cost might be removed. The government might push or regulate banks to get rid of interest only BTL mortgages etc which will hurt even higher yield properties like yours

cells

chucknorris wrote: »

I don't think that they will be a 'mass' exodus, I think new entrants will almost certainly decline a fair bit and there will be some that leave the market. But the I think the decline will be gradual as those who leave the market is only slightly increased but new entrants to the market will decrease.

Definitely correct imo, currently BTL is growing by a net ~250,000 homes a year

So changes even if they suppress BTLs purchases by a huge 100,000 units a year the sector would still be growing but by ~150,000 units a year


However it depends on what happens next. If the government have got it into their heads that BTL is evil and stealing owner homes from families they could get rid of interest as a cost altogether and perhaps even make it repayment mortgages only, which would make it cash flow negative for new entrants using finance and that part of the market would dry up almost completely.

You yourself mentioned it was very difficult for you at the beginning so would/could you have done what you did if it was just repayment mortgages and not able to use interest and finance as a cost?