Tax Relief On Buy To Let Mortgage Interest.

[Venger]

I'm not supportive of the social housing measures because they're not consistent with lower costs and greater net productive opportunity (some other sector - private - will absorb higher rents inc profit instead). While the sector's not perfect the objective should be more supply at running rather than rentier cost. Thus the gun should be aimed at the top of the rent-seeker tree and work down, not vice versa. Any perceived unfairness of social would then resolve itself.

Hmm - it's not an area I'm very familiar with, at all.

Spyguy wins me over with his view of inefficiencies in social housing / housing authorities, that renters pay for.

New interest can buy bust HA out, at lower prices, and run them more efficiently, for lower end rents for renters. Perhaps break up those HA that own many different housing units, and allow many new market participants opportunity to run at lower prices / or the renters themselves opportunity to buy.

British social landlords have borrowed more than £60bn of private finance over the past three decades. ..A Department for Communities and Local Government spokesman said social landlords received £13bn a year in housing benefit and rent increases in the sector had on average been more than double those of private landlords over the past five years.

My local council is staffed full of lazy, useless, thick , ideological, professional sickies. And thats the top performers.

However, compared to my local HA .... the council looks like Goldman Sachs.

HAs have spent an absolute fortune on overstaffing.

And they have made some very very stupid funding decisions.

[Bland Unsight]

Merci, ma petite Cherie.

Touché

Not good enough for a Tony award - but not bad, not bad at all. (You made me look up the ALT code for é, you saucy minx)

[spyguy]

Hmm - it's not an area I'm very familiar with, at all.

Spyguy wins me over with his view of inefficiencies in social housing / housing authorities, that renters pay for.

New interest can buy bust HA out, at lower prices, and run them more efficiently, for lower end rents for renters. Perhaps break up those HA that own many different housing units, and allow many new market participants opportunity to run at lower prices / or the renters themselves opportunity to buy.

Just for Venger:

http://www.thescarboroughnews.co.uk/news/local/hundreds-to-be-hit-by-unfair-bedroom-tax-1-5518301

http://www.whitbygazette.co.uk/news/local/wake-up-and-smell-the-tax-1-5487562

I bet YCH are relieved that Labour won and reversed all the ConDem's spendings cuts.

I mean, you'd not want a Con government to see so many people p1ssing around on a very political campaigning when they are meant to be doing a job.

[Guest_northshore_*]

Hmm - it's not an area I'm very familiar with, at all.

Spyguy wins me over with his view of inefficiencies in social housing / housing authorities, that renters pay for.

New interest can buy bust HA out, at lower prices, and run them more efficiently, for lower end rents for renters. Perhaps break up those HA that own many different housing units, and allow many new market participants opportunity to run at lower prices / or the renters themselves opportunity to buy.

If it brings down costs rather than raises them that's fine with me. I doubt it but quite happy to be wrong.

[Venger]

I bet YCH are relieved that Labour won and reversed all the ConDem's spendings cuts.

I mean, you'd not want a Con government to see so many people p1ssing around on a very political campaigning when they are meant to be doing a job.

Not sure how to interpret that. What the meaning is. It might be 10+ years to rebalance, 'bedroom tax' on empty bedrooms a pain for some now.. and sure some claims not adequate places to downsize to. Over the longer run all the changes should all lead to a more organised system (SMI a loan); fewer family credits mothers churning them out. Better use of housing stock, even if there's something in the claim changes will limit incentives for building more. More personal responsibility; imo. And then possibility of lower rents, clumbersome HAs broken up, possibly.

Anyway point being insurance companies might have opportunity here, at lower prices, than pay top whack for portfolio of 10 houses in Withington/Chorlton from a landlord who though it was always a HPI future.

18 September 2014

Inside Housing

EXCLUSIVE: Housing chief executives' pay rises above inflation

Chief executives of the biggest housing associations in the UK received an inflation-busting 3.85% pay rise on average in the 2013-14 financial year, Inside Housing can reveal.

But the pay of the 22 female chief executives in the biggest 100 associations rose only 0.96% in the last year, widening the pay gap among housing leaders. Male chief executives saw their average take-home pay rise 3.98%.

The average chief executive is now paid £173,321, including their basic salary, bonus and car allowance, compared to £166,890 in the previous financial year.

...Within the average for all housing providers, seven chief executives had pay rises of more than 10%.

Guardian

2014

Social housing chief executives’ enormous pay packets are indefensible

“At a time when rank-and-file workers face pay freezes, and social tenants are being asked to pay higher rents, then I question such a large average rise in pay to senior staff, on top of existing large salaries.”

Who made these comments, in response to the publication of Inside Housing’s annual chief executive salary survey for 2014? A trade union, siding with frontline workers? The campaigning charity Shelter, concerned about how scarce funds for social housing provision are distributed? No. These are the words of Conservative housing minister Brandon Lewis.

..The average chief executive in housing now earns £173,321, a figure which includes salary, bonuses and car allowances. The highest paid individual earned £432,928. It is unjustifiable. (in full, left leaning claims private sector workers don't understand) http://www.theguardian.com/housing-network/editors-blog/2014/sep/26/social-housing-executive-pay-salary-indefensible

[spyguy]

Not sure how to interpret that. What the meaning is. It might be 10+ years to rebalance, 'bedroom tax' on empty bedrooms a pain for some now.. and sure some claims not adequate places to downsize to. Over the longer run all the changes should all lead to a more organised system (SMI a loan); fewer family credits mothers churning them out. Better use of housing stock, even if there's something in the claim changes will limit incentives for building more. More personal responsibility; imo. And then possibility of lower rents, clumbersome HAs broken up, possibly.

Anyway point being insurance companies might have opportunity here, at lower prices, than pay top whack for portfolio of 10 houses in Withington/Chorlton from a landlord who though it was always a HPI future.

YCH HA appears to be staffed from secondment from the Militant left.

They awarded themselves *huge* salaries for sitting around and pursuing Labour related activity - ie. bad COns, No to benefit cuts.

My comment about Labour winning was a pisstake. YCH are so far up its own politcial ar5e that the thought that Labour would lose twice did not enter its mind.

YCH, like a lot of HAs, had bought heavily into Gordo's client state/eternal wealth machine without really thinking through the detail i.e. where in fck sake is the money going to come from?

Edited July 11, 2015 by spyguy

[giesahoose]

One thing is for sure. Even if the landlords don't figure out the risk and added cost here. The mortgage lenders sure will and will adjust rates accordingly

[Neverwhere]

One thing is for sure. Even if the landlords don't figure out the risk and added cost here. The mortgage lenders sure will and will adjust rates accordingly

Absolutely. And then the new risk weightings will come in from Basel and they will increase rates even more. Handily the final appeal against the West Brom rate hike is likely to have been thrown out by then (the BTLers having already lost the original case) so lenders should be able to activate clauses which allow them to hike rates for existing BTL mortgages too.

[SamuearlJackson]

I wonder how many BTL landlords currently in the 20% tax bracket will be pushed over the child benefit and tax credit thresholds by the new way of calculating their taxable income, in addition to being screwed by the mortgage interest changes.

[wherebee]

What this shows is just how much the BTL nightmare was the product of the governments of the past 20 years.

Whenever a BTL whinges at you, point this out - if the 'business' only works because of special market specific government props, it is not a business, it is a taxpayer funded jolly.

[FreeTrader]

I was wondering what the calculation is that gets it to 167%. My brain is too tired to work it out today.

Under typical 125% rental cover assessment we can deduce that lenders require 20% of rent as a buffer to cater for non-interest expenses and voids. There is no obvious reason why this buffer should change because of the proposed taxation change, but since there will now be a tax liability for higher rate payers, the maximum mortgage interest must be reduced for breakeven.

Rent - buffer - mortgage interest - tax = 0

Buffer is 0.2R, so:

0.8R - M - T = 0

or

M = 0.8R - T

The tax liability is computed on net rental income before interest costs, less allowance for interest at basic rate.

For 40% marginal rate and 20% basic rate:

T = (0.8R * 0.4) - (M * 0.2)

Substituting for T:

M = 0.8R - ((0.8R * 0.4) - (M * 0.2))

0.8M = 0.48R

M = 0.6R i.e. rental cover should be 1.0 / 0.6 = 1.6666... or 167% (rounded)

For 45% marginal rate and 20% basic rate:

T = (0.8R * 0.45) - (M * 0.2)

Substituting for T:

M = 0.8R - ((0.8R * 0.45) - (M * 0.2))

0.8M = 0.44R

M = 0.55R i.e. rental cover should be 1.0 / 0.55 = 1.8181... or 182% (rounded)

The general formula given a lender requirement of buffer BUF for voids/non-interest expense, a higher rate tax HR and basic rate BR is:

Rent cover = 1 / ((1 - BUF) * ((1 - HR) / (1 - BR)))

e.g. BUF = 25%, HR = 45%, BR = 22%:

Rent cover = 1 / ((1 - 0.25) * ((1 - 0.45) / (1 - 0.22))) = 1.891, or 189%

Edit: fixed rounding

Edited July 12, 2015 by FreeTrader

[Bland Unsight]

...

Rent cover = 1 / ((1 - 0.25) * ((1 - 0.45) / (1 - 0.22))) = 1.891, or 189%

Buy-to-let landlords. Welcome.

You know how you slept through Mathematics and English and everything worked out fine. You just bet the ranch on crap slave boxes and grew rich, and grew wise, knowing that once all is said and done, there is more said than done.

You know how someone once said inverse proportion, and you know how you remember that so clearly because at that selfsame moment you managed to evict a delightfully crusty bogey from your hard nose.

Well, inverse proportion is back.

Moving from a rental cover of 125% to a cover of 190% moves the face-washing price down by 45%.

I'm shocked, (and I'm determinedly short where you are long).

Good luck with that. See you at the bottom.

[Neverwhere]

I wonder how many BTL landlords currently in the 20% tax bracket will be pushed over the child benefit and tax credit thresholds by the new way of calculating their taxable income, in addition to being screwed by the mortgage interest changes.

Good first post. Welcome to the forum

[lastlaugh]

One thing is for sure. Even if the landlords don't figure out the risk and added cost here. The mortgage lenders sure will and will adjust rates accordingly

Absolutely. And then the new risk weightings will come in from Basel and they will increase rates even more. Handily the final appeal against the West Brom rate hike is likely to have been thrown out by then (the BTLers having already lost the original case) so lenders should be able to activate clauses which allow them to hike rates for existing BTL mortgages too.

I was thinking that this whole thing could be a long drawn out affair, because BTLers are too stupid and blinded by HPI to see the writing on the wall and get out quick. But I'm not so sure now. The lenders are in a bind. Traditionally they've used rental cover and LTV in place of due diligence. But those tools won't work now we are so far off-piste. THe situation is a bit like the CDO issue in the sub-prime crisis. The lenders will have no idea which are the bad portfolios which are destined to go bankrupt, and have to assume they are all bad - which they might very well be. The lenders only option will be a West Brom style rate hike to smoke out the weak players ASAP.

[Neverwhere]

I was thinking that this whole thing could be a long drawn out affair, because BTLers are too stupid and blinded by HPI to see the writing on the wall and get out quick. But I'm not so sure now. The lenders are in a bind. Traditionally they've used rental cover and LTV in place of due diligence. But those tools won't work now we are so far off-piste. THe situation is a bit like the CDO issue in the sub-prime crisis. The lenders will have no idea which are the bad portfolios which are destined to go bankrupt, and have to assume they are all bad - which they might very well be. The lenders only option will be a West Brom style rate hike to smoke out the weak players ASAP.

Lenders can probably reassess existing mortgages based on the information they already have (rents don't seem likely to be going anywhere fast) and I'm sure FreeTrader's calculations are spot on in terms of the level of rental cover that they'll be looking for. It seems unlikely that they'd be willing to risk borrowers moving up a tax band at some point in the future so I wouldn't be surprised if they assumed that all of them were potentially higher rate tax payer for those purposes.

In any case I suspect a lot of the truly subprime stuff is already identified as such, and much of it is probably on UKAR's books. A lot of what might appear to be subprime because it will be running at a loss under these tax changes isn't really subprime from the lender's point of view because the majority of small scale late-entrant BTLers also have other income and/or their own homes and will be unable to escape the debt via bankruptcy regardless of what happens to the actual rental property.

It's certainly going to be interesting to see what happens after the West Brom appeal though. I had previously thought that the impact might be limited to lender's with large pre-2008 (proper subprime) BTL loan books but these tax changes, along with the prospective increase in risk weightings, do make it look like these kinds of clauses could be enacted on a much wider scale.

Interesting times as they say

[Venger]

The general formula given a lender requirement of buffer BUF for voids/non-interest expense, a higher rate tax HR and basic rate BR is:

Rent cover = 1 / ((1 - BUF) * ((1 - HR) / (1 -BR)))

e.g. BUF = 25%, HR = 45%, BR = 22%:

Rent cover = 1 / ((1 - 0.25) * ((1 - 0.45) / (1 - 0.22))) = 1.891, or 189%

Buy-to-let landlords. Welcome.

You know how you slept through Mathematics and English and everything worked out fine. You just bet the ranch on crap slave boxes and grew rich, and grew wise, knowing that once all is said and done, there is more said than done.

You know how someone once said inverse proportion, and you know how you remember that so clearly because at that selfsame moment you managed to evict a delightfully crusty bogey from your hard nose.

Well, inverse proportion is back.

Moving from a rental cover of 125% to a cover of 190% moves the face-washing price down by 45%.

I'm shocked, (and I'm determinedly short where you are long).

Good luck with that. See you at the bottom.

It's very comforting to have so many serious math minded members on the forum, on side of the lower house price fairness my family/younger generations need.

Pulling out the higher-level math effortlessly, while the property-tribers and other landlord forums scratching their heads with even basic math.

In other news, I cracked GO's main email a/c.

[stuttered tight point, M32 SCantk {trans.: Special Circumstances absolute-need-to-know Level Maximum Encryption Code Process},relay, Tracked Copy

NB: Attention: The following is a screen-written text-only dynamically scrolled

discrete-assimilation-opportunity document which may not be vocalised, glyphed, diaglyphed, copied,

stored or media-transferred in any conventionally accessible form. Any attempt to do so will be noted.

NB: IMPORTANT: Established Special Circumstances secrecy methodology applies at M32 level - see following

schedule re. definitions, precedents, warnings, likely sanctions and punishments. You are strongly

advised to study this schedule carefully if you are not already fully familiar-

[override]

[schedule read-out aborted.]

Begin-Read point of Tracked Copy document #SC•.c4: +

From: G.O - HM Treasury

To: Governor M.C. - Bank of England

strictly as SC cleared:

HPC begins!

In the name of ever more Conservative home-owner votes in future from younger demographics, and for all the £Trns in implied financial system revenue and profits. Double win. Oh dear Blair's property portfolio.

PS:Gulp!

PS2: To the landlord VI Forever HPIers - blah blah blah

End Signal Sequence.

NB: The preceding Tracked Copy document is not readable/copyable/transmissible without its

embedded security program.

NB:IMPORTANT: Communicating any part, detail, property, interpretation or attribute of the

preceding document,INCLUDING ITS EXISTENCE-

[override]

[Post-document warning read-out aborted.]

[Venger]

BTW re Blah Blah Blah.

A couple of hours after the Institute for Fiscal Studies delivered a damning verdict of the first all-Conservative Budget in 19 years, a member of the Treasury team accidentally sent an email to journalists containing three words: "blah, blah, blah".

http://www.independent.co.uk/news/uk/politics/budget-2015-treasury-has-just-sent-out-an-email-with-three-words-blah-blah-blah-10378591.html

Seems like they're seriously uncompromising about criticism of the budget, especially from the hpi-life-is-a-dream-fantasy-landers.

[mattyboy1973]

I was thinking that this whole thing could be a long drawn out affair, because BTLers are too stupid and blinded by HPI to see the writing on the wall and get out quick. But I'm not so sure now. The lenders are in a bind. Traditionally they've used rental cover and LTV in place of due diligence. But those tools won't work now we are so far off-piste. THe situation is a bit like the CDO issue in the sub-prime crisis. The lenders will have no idea which are the bad portfolios which are destined to go bankrupt, and have to assume they are all bad - which they might very well be. The lenders only option will be a West Brom style rate hike to smoke out the weak players ASAP.

If lenders do raise the cover requirements then of course BTL mortgages are going to be much harder to get, in a somewhat similar way to MMR for OO. That'll mean BTLers coming to the end of fixed rates (2-5 years on average), or introductory offers aren't going to be able to remortgage and are going to get thrown under the bus on the lender's SVR. For many this is likely to happen around the time that tax relief is phased out..

edit: example using current rates:

Skipton - current 2 year fixes 2.29 - 3.19%, moving to SVR 5.19% (boom!)

Edited July 12, 2015 by mattyboy1973

[mmt]

Buy-to-let landlords. Welcome.

You know how you slept through Mathematics and English and everything worked out fine. You just bet the ranch on crap slave boxes and grew rich, and grew wise, knowing that once all is said and done, there is more said than done.

You know how someone once said inverse proportion, and you know how you remember that so clearly because at that selfsame moment you managed to evict a delightfully crusty bogey from your hard nose.

Well, inverse proportion is back.

Moving from a rental cover of 125% to a cover of 190% moves the face-washing price down by 45%.

I'm shocked, (and I'm determinedly short where you are long).

Good luck with that. See you at the bottom.

It has been a long time coming. Buy to let is a cancer in the city I live it. It is visibly destroying streets and communities. I live on a small street of about 70 victorian terraces. I know that one investor owns at least 6 of the houses on the street. The doors and the windows have all been replaced with UPVC. The houses have been divided into flats. There are parking issues. Tenants are regularly replaced. There is no community.

Edited July 12, 2015 by crashtimus prime

[mmt]

It has been a long time coming. Buy to let is a cancer in the city I live it. It is visibly destroying streets and communities. I live on a small street of about 70 victorian terraces. I know that one investor owns at least 6 of the houses on the street. The doors and the windows have all been replaced with UPVC. The houses have been divided into flats. There are parking issues. Tenants are regularly replaced. There is no community.

Another example - the other day I walked pasted a victorian terrace with a to let sign outside. The curtains were open in the front room so I had a look inside. The front room was, I'd guess, about 3m x 4m. It had a bed, a mini kitchen AND a shower cubicle in the corner. Shocking.

[Ah-so]

Under typical 125% rental cover assessment we can deduce that lenders require 20% of rent as a buffer to cater for non-interest expenses and voids. There is no obvious reason why this buffer should change because of the proposed taxation change, but since there will now be a tax liability for higher rate payers, the maximum mortgage interest must be reduced for breakeven.

Rent - buffer - mortgage interest - tax = 0

Buffer is 0.2R, so:

0.8R - M - T = 0

or

M = 0.8R - T

The tax liability is computed on net rental income before interest costs, less allowance for interest at basic rate.

For 40% marginal rate and 20% basic rate:

T = (0.8R * 0.4) - (M * 0.2)

Substituting for T:

M = 0.8R - ((0.8R * 0.4) - (M * 0.2))

0.8M = 0.48R

M = 0.6R i.e. rental cover should be 1.0 / 0.6 = 1.6666... or 167% (rounded)

For 45% marginal rate and 20% basic rate:

T = (0.8R * 0.45) - (M * 0.2)

Substituting for T:

M = 0.8R - ((0.8R * 0.45) - (M * 0.2))

0.8M = 0.44R

M = 0.55R i.e. rental cover should be 1.0 / 0.55 = 1.8181... or 181% (rounded)

The general formula given a lender requirement of buffer BUF for voids/non-interest expense, a higher rate tax HR and basic rate BR is:

Rent cover = 1 / ((1 - BUF) * ((1 - HR) / (1 -BR)))

e.g. BUF = 25%, HR = 45%, BR = 22%:

Rent cover = 1 / ((1 - 0.25) * ((1 - 0.45) / (1 - 0.22))) = 1.891, or 189%

Thank you for laying this out in such detail.

I did end up doing a calculation yesterday in excel and got to 150% rental cover rather than 167%. Essentially this boils down to the original rental 125% cover plus an extra 20% to go to the tax man.

Actually, not quite sure why that wasn't 145%, but who an I to argue with Excel?

But the key thing is, banks will have to change their underwriting standards if the borrower is a 40% tax payer. LTV will need to drop.

The BOE already appears to have BTL in its sights so you would think that they will be on the banks straight away about this.

[sleepwello'nights]

Touché

Not good enough for a Tony award - but not bad, not bad at all. (You made me look up the ALT code for é, you saucy minx)

As our banter is a bit off topic I'll bow out now. To try and look even saucier I'll start following the The Road To <10% Body Fat thread more diligently

Thanks for the alt keys tip, thanks ♥ ♥

[FreeTrader]

Thank you for laying this out in such detail.

I did end up doing a calculation yesterday in excel and got to 150% rental cover rather than 167%. Essentially this boils down to the original rental 125% cover plus an extra 20% to go to the tax man.

Actually, not quite sure why that wasn't 145%, but who an I to argue with Excel?

But the key thing is, banks will have to change their underwriting standards if the borrower is a 40% tax payer. LTV will need to drop.

The BOE already appears to have BTL in its sights so you would think that they will be on the banks straight away about this.

Can you show your workings as to how you came to 150%?

BTW, that should have been 182% rounded for the 45% marginal rate of course - now fixed in the original post.

Edited July 12, 2015 by FreeTrader

[olde guto]

It has been a long time coming. Buy to let is a cancer in the city I live it. It is visibly destroying streets and communities. I live on a small street of about 70 victorian terraces. I know that one investor owns at least 6 of the houses on the street. The doors and the windows have all been replaced with UPVC. The houses have been divided into flats. There are parking issues. Tenants are regularly replaced. There is no community.

Tell me about it, I've seen the damage flat conversion developers and BTLers (HMO and those converted flats) can do to an area. They've managed to degenerate an area of once genteel middle-class 3-storey victorian town houses in to a near slum. Looks shabbier than a lot of council estates, and one of the those streets had at one point (maybe still has) the highest burglary rate.

[canbuywontbuy]

Apologies if someone has already made this point, but isn't one of the big reasons to do BTL....the idea your assets WILL (not just "likely") increase in value? So won't BTLs getting cold feet mean more properties on the market....mean lower prices....mean BTL is even less attractive? Essentially a vicious circle for BTL?