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Bank of England Base Rate – Rising, but when? And what it means for us
For a while now there has been a lot of discussion and speculation about Bank of England base rate rising. This is a very speculative topic of conversation and there are so many differences of opinion. I have heard commentary around the next BBR increase to be in January 2016 but most recently the Association of Mortgage Intermediaries trade body stating that it won’t be until Q4 2016. I think this in itself states that clients need an IFA to guide them. In terms of Landlords and Investors the tax situation is going to bite some of them particularly those in higher rate tax bands. The Government is certainly reducing the amount of tax relief allowed on rental properties through reducing the amount you can claim on the interest payments made on a buy to let and also scrapping the wear and tear 10% allowance on furnished properties. This means you will be paying more in tax and earning less income. For some this will not be viable to keep multi-portfolios of property. However, selling BTL property will also be subject to CGT so it is a double edge sword.
There was a lot of hype around people being able to draw pension funds to purchase BTL property, but it is not all what it is cracked up to be. Older clients are finding it very difficult to get a mortgage because of their age constraints. The pension changes under way actually make buy-to-let a considerably less attractive option than many other investment options.
This is mainly because of the different types of tax involved in owning and renting out additional properties. Because residential property can’t sit within a pension (unlike commercial property, shares and many other assets), you’ll need to withdraw cash out of the pension account, paying tax on the withdrawal as if it were income.
Say your target property costs £300,000 and you want to put down a deposit of £150,000. Even after your 25% tax-free lump sum, the withdrawal of £150,000 from your pension will trigger an income tax bill of almost £40,000. And that generously assumes you’ve no other income for the year.
Once the property starts generating rental income, this will also be taxable. While activity has no doubt increased initially due to the new pension freedoms, the market hasn’t been set alight by the changes as yet. Lenders do continue to offer more products and change their lending criteria which should hopefully help accommodate more buy to let investors. There are some deals out there but a good Financial Advisor will be able to help them find the best one.
The Mortgage Credit directive (MCD) will be implemented on the 21st March 2016. This is a European Union reform which will drive a number of changes across the mortgage industry, aimed at ensuring a consistent approach across the EU.
Some of the changes being introduced are around the disclosure of disclosure of procuration fees being paid by all lenders if requested by the borrower. Mortgage related documents will now be the same across the EU for a more linked up approach.
The buy to let space will go through some regulatory changes with a new area of business called Consumer Buy to Let. This gives more regulatory protection to certain types of landlords such as first time landlords and clients who become landlords accidentally or had no intention at the time to own a let property such as inherited property or let to buy. The Council of Mortgage Lenders have a statement of practice that Lenders have all signed up to.
A Foreign currency mortgage is defined as a mortgage in a different currency to that in which the customer receives income, or a mortgage in a different currency to the EEA state in which the customer is resident. The regulation imposes a rule on lenders to disclose to customers when there is a fluctuation in exchange rates of more than 20%. This will affect the ex-pat mortgage markets with a number of lenders pulling out of this market in recent months which has further restricted options open to ex pats. People who are paid in a currency that is not pound sterling will see the same restrictions with their choice of mortgage lenders.
For a further discussion I can be contacted as follows:
0141 331 2221