August 9, 2018

The effect of recent tax and policy changes on mortgages

The recent tax and policy changes have led to subdued growth in the buy-to-let market. The new mortgage deal may […]

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The recent tax and policy changes have led to subdued growth in the buy-to-let market. The new mortgage deal may assist buyers in maximising the tax relief that is soon to be phased out. Meanwhile, lenders analyse the potential attitude changes among consumers following the interest rate spike announcement.

Tax savings with new buy-to-let mortgage deal

The changes to the current tax relief structure will be phased over the next four years, meaning that 50% of costs will still be deductible in the 2018-19 tax years and will subsequently drop to 25% in 2019-20 until finally reaching a 20% basic tax relief by 2020-21. In order to make the most of the existing tax relief on finance costs before it disappears for good, the Leeds Building Society was the first to offer mortgages that include a high upfront fee and a low-interest rate.

High upfront fee products allow landlords to front-load funding costs and maximise the use of existing tax relief while minimising the interest payable in future years would help their profits when tax relief is less favourable. Alternatively, in some cases, the size of the loan may be such that it may be worth opting for a high initial fee for a lower rate regardless of the tax change. With highly leveraged landlords fearing that their property investments will no longer be profitable after the change, some have considered moving their ownership of properties into a limited company, where such expenses remain deductible.

The option of trading off fees and rates, coupled with Bank of England reports suggesting that mortgage approvals for house purchases have hit a five-month high in June, both suggest a positive outlook for the future of the buy-to-let market.

Forecasting the impact of the recent interest rate spike

With the Bank of England Monetary Policy Committee announcing their unanimous vote to increase base interest rates from 0.5% to 0.75% last week, the Association of Short Term Lenders (ASTL) has expressed concerns that the interest rate spike could influence long-term lenders, as they may feel compelled to raise rates. In addition, this announcement may change consumer attitudes and somewhat subdue the recent growth in credit-card borrowing, which has reached the second-highest level since the financial crisis, after rising by £600m in the same month.

Many real estate lenders do not believe that this move is likely to cause a major impact on short-term loans, given the unlikely scenario of further rate increases in the medium term. Whilst such changes will add £22 to the typical £175,000 tracker mortgage, they are likely to go unnoticed by most homeowners, given that more than half of all borrowers are currently on fixed rates.

For comments on the recent tax and policy changes, contact Tiger Financial here.

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