Budget 2015 Interest Tax Deduction Landords - Analysis of impact

chucknorris

cells wrote: »

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?

No I couldn't have, the day after the budget changes were announced I looked at the first couple of properties that I bought, and re-ran the figures applying the new post budget tax rules. When I first bought I was only covering costs and showing a very small profit, but I was content with that, because I was investing for the long term. But with the new tax rules, there is no way that I would (or could) have taken on those initial losses, in not only the first year, but quite a few more subsequent years before breaking even. It definitely is a 'game changer' for new entrants (and highly geared current landlords), it will also be interesting to see what happens to rents.

Generali

chucknorris wrote: »

No I couldn't have, the day after the budget changes were announced I looked at the first couple of properties that I bought, and re-ran the figures applying the new post budget tax rules. When I first bought I was only covering costs and showing a very small profit, but I was content with that, because I was investing for the long term. But with the new tax rules, there is no way that I would (or could) have taken on those initial losses, in not only the first year, but quite a few more subsequent years before breaking even. It definitely is a 'game changer' for new entrants (and highly geared current landlords), it will also be interesting to see what happens to rents.

What will be particularly interesting to see is where people have been remortgaging properties in order to use the capital gain to buy new places or simply subsidise their consumption. MEW got very high in the years leading up to the GFC, IIRC maxing out at something nuts like 10% of GDP (I don't remember the exact number but it'll be on the interwebs somewhere).

If someone has taken the unrealised capital gain and borrowed against it as an individual rather than as a company then (s)he may well find themselves in a position where they can't afford to sell but can't afford not to sell either.

It reminds me of the old Buffet line about us only knowing who has been swimming naked when the tide goes out as I don't think anyone really knows how many people have been following that business model. It was how the Wilsons started I believe. I wonder what their numbers are looking like.

ETA

I just found the latest Trends in Lending from the BoE and the BTL special breakout (P7-10) makes for some quite sobering reading. Key points are:

- BTL lending is now 15% of the outstanding mortgage market
- BTL remortgages make up 52% of gross remortgage advances. This is presumably paper profits being realised and used for other means, be it to buy another BTL, other assets or simply to spend on a nice car or holiday
- Since 2008 75%+ LTV loans as a proportion of all BTL loans, i.e. the riskier ones, have increased to become by far the larger chunk of the market. About 1 in 8 BTL loans are now 80-85% LTV.
- A BTL loan is twice as likely as an OO loan to end up in repossession. This is despite lower default rates on BTL loans and is probably due to great lender forbearance on OO loans. (I.e. the bank will just repossess you if you default on a BTL loan but will give some grace on an OO loan).

2017-8 could be an interesting year for the UK housing market, especially if global interest rates are rising.

chucknorris

Generali wrote: »

What will be particularly interesting to see is where people have been remortgaging properties in order to use the capital gain to buy new places or simply subsidise their consumption. MEW got very high in the years leading up to the GFC, IIRC maxing out at something nuts like 10% of GDP (I don't remember the exact number but it'll be on the interwebs somewhere).

If someone has taken the unrealised capital gain and borrowed against it as an individual rather than as a company then (s)he may well find themselves in a position where they can't afford to sell but can't afford not to sell either.

It reminds me of the old Buffet line about us only knowing who has been swimming naked when the tide goes out as I don't think anyone really knows how many people have been following that business model. It was how the Wilsons started I believe. I wonder what their numbers are looking like.

I'm not sure when the Wilsons stopped buying, I suspect that they will be OK, as it was probably quite a few years ago. I never did mew, when I first bought (in 1991) I had to wait quite a while before I had some significant equity, and I didn't want to rush back into being very highly geared, as I knew there would be another correction at some point, although I must admit that I thought it would be around the early 00's rather than 2008.

I did invest again in the late 90's, but that was with 'saved' money rather than mewing.

Thrugelmir

Generali wrote: »

It reminds me of the old Buffet line about us only knowing who has been swimming naked when the tide goes out as I don't think anyone really knows how many people have been following that business model. It was how the Wilsons started I believe. I wonder what their numbers are looking like.

The Wilsons were forerunners though as started building their empire a long back. They did the maths though. How many jumped on the wave to surf without crunching the numbers. A basic requirement of any new venture is to have a business plan. Doesn't matter what the business is. You have to expect the unexpected.

Generali

Thrugelmir wrote: »

The Wilsons were forerunners though as started building their empire a long back. They did the maths though. How many jumped on the wave to surf without crunching the numbers. A basic requirement of any new venture is to have a business plan. Doesn't matter what the business is. You have to expect the unexpected.

Don't get me wrong, I don't think that the Wilsons are going to be ruined as a result of all this but I do wonder where it leaves them.

cells

Generali wrote: »

2017-8 could be an interesting year for the UK housing market, especially if global interest rates are rising.

the changes have definitely thrown an unseen spanner into the market

right now I cant seem to figure out (not that i've tried very hard) if it can push house prices down or not.

something like 200,000 - 250,000 NET homes are added to the rental stock each year. Well if 200,000 buyers disappear from the demand side what is going to happen to prices. Even if 100,000 disappear from the demand side what's going to happen to prices.

Also the rental stock is not evenly spread. For example in London its over 25% of the stock and outside London its closer to 16% of the stock. So any drop off in BTL buyers, or increase in BTLers selling out should impact places like London more than rUK

It gets even more complicated if you factor in the BTLers tend to buy at the lower end of the market (flats, ex council, terrace homes, etc etc) so they could be more impacted


however against all of the above is the fact that we are going to see the population grow by 5 million people over the next 10 years. That we need some 3-4 million additional homes but will only get 1.5 million built over the next 10 years.

cells

Generali wrote: »

Don't get me wrong, I don't think that the Wilsons are going to be ruined as a result of all this but I do wonder where it leaves them.

my estimate is that their tax bill will go up by £1.5 million a year but that they would still be cash flow positive

However if i were a mid 60 something couple who was already thinking of selling I would make sure its done and dusted within two years. As chuck norris says they needed not have gone this far as they were already at a point of having more money than they could spend some time ago so for them its now only a matter of draw or lose its not win or lose.

If the conservatives remove the 20% remaining on finance costs and especially if they regulate the BTL sector (which would i assume mostly mean that it goes from interest only deals to only allowing repayment mortgages) then there might be a house price dip so might as well take your cards off the table while you are £100m up why risk staying on the table to make another £50m you cant spend (and will be taxed with capital gains @28% and then the death tax at 45% anyway)

cells

Generali wrote: »

If someone has taken the unrealised capital gain and borrowed against it as an individual rather than as a company then (s)he may well find themselves in a position where they can't afford to sell but can't afford not to sell either.

It reminds me of the old Buffet line about us only knowing who has been swimming naked when the tide goes out as I don't think anyone really knows how many people have been following that business model. It was how the Wilsons started I believe. I wonder what their numbers are looking like.

Maybe the extremely geared who are on very poor deals might find that their portfolio goes slightly cash flow negative in which case they have to make up that cash flow in some way. It might be subsidising the rent from another job/investment or it might be selling a few of their homes and using the equity to subsidise the negative cashflow

personally I think there will be few such landlords with negative cash flow as its phased in over 5 years and rents will increase during that time by perhaps as much as 20-30% (due to inflation) and also prices may increase by the same 30% giving the few who are neg-cashflow a lot of equity from the sale of 1-2 properties to tide over the neg cashflow until rent increases save them

My current thinking is that BTL will grow by another 500,000 units over the next 2-3 years but the rate of growth will slow perhaps considerably once this tax change is seen in the annual tax returns

Thrugelmir

Generali wrote: »

Don't get me wrong, I don't think that the Wilsons are going to be ruined as a result of all this but I do wonder where it leaves them.

Nature of this country that we despise and envy people that think of something first. I'm sure that they will live a comfortable and happy retirement. By now they will have grown thick skins.

BobQ

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.
.........................
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Does this not mean that someone like CONRAD will no longer hold the BTLs personally, but instead form a company to own them? Am I correct that the change only affects individuals?