Tax Relief On Buy To Let Mortgage Interest.

[Venger]

I'm in general agreement with your analysis, but don't think that the full ingredients are in place yet for an immediate crash yet, as you say we need some heavily distressed sellers.

Or motivated sellers coming to market, with an eye to selling up for a fortune now.. more amenable to accepting lower prices. Although I generally accept in it for quite a haul of time, as market participants on buying-side slowly realise it's not a no-risk HPI forever buying party, and on the selling side... slow acceptance exits are narrowing (including tightening for future foreign buyers). (Especially the BTLers for slow acceptance... some on PT still bragging that Gov is on their side, and crowdfunding etc will get into BTL to keep prices high.) Although it might not take too many smarter sellers to tilt market quite a bit in the early stages.

Prices are utterly insane. Not sure how sellers can resist rushing to market to cash in. When something gives, more sellers will look to sell - when sentiment changes - and be a lot more amenable to accepting lower prices to bring down wider market.

“Demand is intrinsically linked to affordability, and that’s linked to how much banks are prepared to lend and how much people are prepared to borrow.

Demand for housing is a very flexible thing. Saying something isn’t going to happen because it hasn’t happened yet doesn’t really make any sense. That’s like saying because I haven’t died yet I won’t, but I guess I probably will. And a housing crash is much the same. Something not happening simply makes it more likely that it will, rather than it won’t, if the conditions are in place, and the conditions are in place.

Markets are driven at the margin. They’re driven by people who have to buy or people who have to sell. So when you get to the point when there are people who must sell, and that will come, then prices fall across the board because not many people have to be forced to sell at a low price to push values down.”

[Byron]

I think that a lot of BTLers will have trouble admitting to themselves that it is time to sell.

Many are middling sort of people, lower management, clerical etc., not business people at all.

They see their BTL Empire as status and evidence of their self worth.

Tale it away and it is like taking away a baby's comfort blanket.

[XswampyX]

The recycling of unearned equity back into the market.

Remortgaging now accounts for two thirds of all buy to let mortgage transactions, according to the latest Mortgages for Business Complex Buy to Let Index.

• Two thirds (66%) of buy to let loans are now for remortgaging – just 34% for new purchases
• Trend even clearer for more complex property types – remortgaging now 73% of HMO loans
• Loan to value ratios (LTVs) rise across all property types as landlords leverage their portfolios
• Rental yields rise to 6.4% for standard BTL properties, while HMO yields break through 10%

In the first quarter of 2015, 66% of mortgages against standard or ‘vanilla’ buy to let property were remortgaging loans, leaving just 34% of buy to let mortgages written in Q1 for the purposes of purchasing new properties. Previously, remortgaging represented only 62% of vanilla buy to let mortgages as little as three months ago, in Q4 2014.

For houses in multiple occupation (HMOs) remortgaging is now an even higher proportion, standing at 73% of HMO mortgages in Q1, up from 70% in Q4 2014.

Moreover, the same trend is even more pronounced for multi-unit freehold blocks (MUFBs) with remortgaging representing 89% of mortgages in Q, compared to just 42% in the final quarter of 2014. Semi-commercial property witnessed the same trend but with a more gradual change, from 86% to 87% of new loans agreed for remortgaging.

Loan to value ratios rise

As landlords have remortgaged in increasing numbers, their average loan to value ratios (LTVs) have crept slightly higher over the course of the last three months. For ‘vanilla’ buy to let, the average LTV now stands at 66% in Q1 2015, compared to 63% in Q4 2014.

Source : - http://www.mortgagesforbusiness.co.uk/news-insight/2015/april/landlords-remortgage-at-twice-rate-of-new-purchases/

If you can afford to pay the CGT, well it's with your own money that you put in at the start!

[Guest_growlers_*]

The recycling of unearned equity back into the market.

Source : - http://www.mortgagesforbusiness.co.uk/news-insight/2015/april/landlords-remortgage-at-twice-rate-of-new-purchases/

If you can afford to pay the CGT, well it's with your own money that you put in at the start!

Per my last post, I'm not convinced the CGT thing is going to be a huge deal for BTL.

Huge being massive insolvencies, forced sales etc.

See analysis but unless you are + 75% LTV you should be ok.

Things get hairy above that point but I suspect that is a small population.

[XswampyX]

That's ok, I don't mind.

Try your chart with a 25% drop in prices, leaving the loan at the same amount.... .

[Exiled Canadian]

Per my last post, I'm not convinced the CGT thing is going to be a huge deal for BTL.

Huge being massive insolvencies, forced sales etc.

See analysis but unless you are + 75% LTV you should be ok.

Things get hairy above that point but I suspect that is a small population.

I thought your analysis was very interesting.

If house prices started falling then LTV's would rise - so a HPC would "trap" more landlords into a situation where their CGT liability out weighed their equity. Have I got this right?

[Guest_growlers_*]

I thought your analysis was very interesting.

If house prices started falling then LTV's would rise - so a HPC would "trap" more landlords into a situation where their CGT liability out weighed their equity. Have I got this right?

I'm no expert so don't take my word for anything.

Hmmm...I'm not smart enough to work this out. My spreadsheet was a snapshot in time.

If prices fall 20%, your receipts fall 20% but your capital gains tax expenditure just falls by 20% * 28% so yes a BTL with massive equity will be worse off as prices fall. i.e. the orange bit I had highlighted will spread.

That's why I wanted to work out the mathematical formula earlier. Could define the relationship.

[winkie]

The thing with owner occupiers they have no need to sell, there only need is to rapidly repay their debt.....great and far easier when rates are so low, they are creating their own equity whilst saving money so they will get the best low risk rates of all.......what do they care what their home is worth, however much it loses the next home will have lost the equivalent in value and if trading up less debt to take up......whoopee.

[moesasji]

Per my last post, I'm not convinced the CGT thing is going to be a huge deal for BTL.

Huge being massive insolvencies, forced sales etc.

See analysis but unless you are + 75% LTV you should be ok.

Things get hairy above that point but I suspect that is a small population.

I'm not sure that your analysis is completely correct....there is a tax-free allowance that doesn't appear to be in your spreadsheet, see https://www.gov.uk/capital-gains-tax/allowances

btw) Up to ~30k the taxrate is 18%, not 28%: see for example www.sayersb.co.uk/tax rates/cgt.html for a "clear" table.

Edited July 26, 2015 by moesasji

[Guest_growlers_*]

I'm not sure that your analysis is completely correct....there is a tax-free allowance that doesn't appear to be in your spreadsheet, see https://www.gov.uk/capital-gains-tax/allowances

btw) That page is pretty confusing. As far as I can tell this tax-free allowance only appears to apply for the year you sell in contrast to some calculations I've seen here.

I included £10k - rough and ready, couldn't remember exact figure but close enough.

You get 10K pa for sales made that year from memory.

There are exemptions to do with length of ownership? To be honest I don't know what I'm talking about, it's been years since I looked in into CGT. But I've used capital gains - 10K * 28%.

[moesasji]

I included £10k - rough and ready, couldn't remember exact figure but close enough.

Now that I got my calculator out I see that you indeed subtracted it....sorry for the noise!

Your estimates are a bit high as for the first ~30k the taxrate will be 18%, but as a rough guide it works.

*) Indeed this only appears to apply for properties bought after 2010. Too complex to think about on a sunday afternoon.

Edited July 26, 2015 by moesasji

[spyguy]

I think that a lot of BTLers will have trouble admitting to themselves that it is time to sell.

Many are middling sort of people, lower management, clerical etc., not business people at all.

They see their BTL Empire as status and evidence of their self worth.

Tale it away and it is like taking away a baby's comfort blanket.

With a quick glance, BTL looks lucrative.

However, once you start putting numbers to it - IRs, voids etc etc you start to see its hardly a highway to wealth.

Mind you, the same goes for investment banks/prop trading - all the returns are gained by insane leverage.

People's greed takes over them.

On a side note, Im watching the old Dr Who's on Horror.

One's popped up now with an attractive, skimpily dressed assistant, Lousie Jameson.

Out of furthering my enjoyment of the telly, I searched to see if she'd been in anything more 'artistic' - she had, Tenko.

I also came across this:

http://www.dailymail.co.uk/news/article-2816545/Women-stars-fleeced-glamorous-pyramid-swindle-Rula-Lenska-Shirley-Anne-Field-caught-extraordinary-rich-quick-scheme-thousands-Doctor-beauty.html

Stupidity + greed. Like TNT + matches.

Edited July 26, 2015 by spyguy

[XswampyX]

I thought your analysis was very interesting.

If house prices started falling then LTV's would rise - so a HPC would "trap" more landlords into a situation where their CGT liability out weighed their equity. Have I got this right?

That's the gist of my argument... if your LTV > 75% then you won't be able to pay the CGT on a property that you have refinanced over a number of years.

The length of time, the LTV and the amount of HPI are important, so it won't apply to every BTL'er. But this 'problem' is the way BTL has been pushed as a business.

The only way I can see an escape is to sell your properties in the opposite order that you bought them for. The newest purchase first. Of course you have to price it cheap to sell or you can't move onto the next one. Also the cheaper you sell it the less CGT you have to pay!

[Guest_northshore_*]

I probably did this wrong.

Basically took a £500k sales price property and did a matrix of different purchase prices vs different LTV.

Calculate Chargeable gain at 28% (less £10k allowance).

Calculated loan outstanding at different % LTV, deduct from sales prices and then deduct capital gain liability.

Bottom line - again, probably wrong, I've had a couple of pints! - I'm not sure this is a massive problem for BTL landlords.

If you are under 75% should be cash neutral at worst.

Looks like you need to calculate loan outstanding from the purchase price before deducting from sales price, or are you assuming perpetually constant refinancing & leverage?

[pipllman]

also remember that a lot of BTLers have opted for long term fixed rate mortgages

usually these come with chunky redemption fees, up to 5% for example with nationwide http://www.nationwide.co.uk/about/media-centre-and-specialist-areas/media-centre/press-releases/archive/2014/5/02-may-nationwide-reduces-early-redemption-charges

so, taking a 75% on a £150k property (i.e. £112.5k mortgage), that could mean an early redemption fee of £5,625 to be found too

[Bland Unsight]

That's why I wanted to work out the mathematical formula earlier. Could define the relationship.

Enjoy the pdf at the link, Death by HPI. My feelings will survive a confrontation with the discovery that I'm made an error, but it looks right to me.

[winkie]

Enjoy the pdf at the link, Death by HPI. My feelings will survive a confrontation with the discovery that I'm made an error, but it looks right to me.

Looks Greek to me.

[pipllman]

Bailed out with almost zero interest rates......not to save the punters but to save themselves along with QE to shore up the lenders.....the plates are still spinning.

Talking about spinning plates, a friend of mine did this picture

[Bland Unsight]

Looks Greek to me.

That's not fair - I'm very sensitive about being called pretentious, so there isn't so much as an alpha, just good honest decent Engerlish letters.

I'd like to see FT's Long Good Friday gag with this artistic representation of what it is like to be a moar-rooned interest-only mortgage financed buy-to-let investor, forced to sell as taxation changes have sent their portfolio into negative carry territory only to discover that they haven't the equity in the portfolio to pay the capital gains tax.

"Where's the f**king money, shithead?"

All your Assetz are belong to HMRC

Edited July 26, 2015 by bland unsight

[Guest_growlers_*]

Enjoy the pdf at the link, Death by HPI. My feelings will survive a confrontation with the discovery that I'm made an error, but it looks right to me.

I look fwd to reading this later!

Thx!

[Venger]

Enjoy the pdf at the link, Death by HPI. My feelings will survive a confrontation with the discovery that I'm made an error, but it looks right to me.

That paper - eek. I've not got the best grasp on all the advanced formula/calculations, but would certainly expect it to be on the mark, from you.

(Lifted the info below from a thread of a quiet part of the forum - just so the BTLers guest readers have some realisation to some of the minds on HPC).

In light of that I realise that you may in fact already know from my posting that I was once a Chartered Accountant, (if so apologies for pointing it out again). I was interested to read that you are not ACA qualified; you appear from the 2009 post to be a book-keeper in a small accountancy firm.

I qualified ACA in the Financial Services Practice of one of the world's leading accountancy firms. ACA is no cake-walk, and if you're not the brightest, it was probably smart to avoid it. I hear CIMA is a lot easier - or maybe just a NVQ or something like that?

[XswampyX]

Same house, just with different amounts of HPI. Equity withdraw down to original 15% to finance more of them...

[Killer Bunny]

Enjoy the pdf at the link, Death by HPI. My feelings will survive a confrontation with the discovery that I'm made an error, but it looks right to me.

Tweeted

[Bland Unsight]

That paper - eek. I've not got the best grasp on all the advanced formula/calculations, but would certainly expect it to be on the mark, from you.

(Lifted the info below from a thread of a quiet part of the forum - just so the BTLers guest readers have some realisation to some of the minds on HPC).

That's kind, Venger, but the truth is that it is all quite straightforward, from a mathematical machinery point of view.

I've just done a sink of dishes and thought about what the maths says, and what it says is simple. The leveraged portfolio landlord strategy is a one way bet on house price inflation continuing forever.

All the while the Revenue are deprived of SDLT because houses are not passing between owner-occupiers, they are just being held by so-called investors. The only way that the Capital Gains Tax can be paid is if before disposing of the portfolio the investor stops re-mortgaging and allows further house price inflation to reduce the leverage.

It is shockingly, shockingly stupid. If they don't get their magic HPI forever then the end game is that they have a CGT bill that they can't pay because the already spent the gain on more houses.

The worst part of this is it has nothing to do with the budget changes! The idea of them moar-rooning themselves was always true. The only link to the Summer Budget is that now they won't be able to hold on for HPI to reduce the leverage.

I don't really feel angry. What I feel is most akin to grief. All this wasted time and money just so crap banks could find common cause with greedy idiots and leverage the rest of us out of the homes in our communities.

I think that the HMRC are coming for these morons. About time too.

Edited July 26, 2015 by bland unsight

[Bland Unsight]

Tweeted

Thank you.