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I have recently greatly enjoyed reading the many interesting articles, and comments, on the excellent Property118 website. A major content provider therein produced in October last year a little article on Equity Finance, something that is new to me, (also discussed in this Guardian piece).

The mechanics of the lending are interesting and I refer you to the article.

One feature that strikes me is that when the loan is settled up on disposal the equity finance provider receives a share of the capital gain in proportion to twice the lender's equity interest, e.g. is the equity finance provider acquired 10% of the equity, they capture 20% of any subsequent gain. (Of course all the CGT would still be payable by the borrower, though of course their ability to pay it would be adversely affected by having to pay out a disproportionate share of the gain to the provider of the equity finance.)

Tangentially, as I understand matters from the author of the piece at the link, before the buy-to-let investor can be granted the equity finance, which results in a second charge on the property, the mortgage lender who provided the first charge mortgage must allow the second charge. Helpfully the author also produces a list of lenders who are, in his opinion, amenable to allowing the second charge equity finance.

The Mortgage Works

BM Solutions
Leeds Building Society
Godiva
Platform
Mortgage Trust
Kent Reliance
Keystone
Virgin Money
Shawbrook Bank
Woolwich
Nat West
Kensington

I am really starting to settle on the idea that what we have had since 2003 is a buy-to-let bubble, and it is being burst. The lenders and their fellow travellers have staked a lot of money on this bubble, it will be interesting to see whether or not they can be made whole by the disposal of the properties, should the need arise. I may be being overly pessimistic, but then I cleave to the idea that a UK bank is best understood as a large organisation run in the interest of its executives which uses mortgages secured on residential property to lend too much, and then explodes.

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I'm immediately wondering what the situation is in regards to tax relief with this kind of finance? It clearly is a financial cost but as it's taken from the capital gain rather than the income does this mean that it attracts no tax relief whatsoever?

Restricting finance cost relief for individual landlords

. . .

Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.

. . .

Individuals will be able to claim a basic rate tax reduction from their Income Tax liability on the portion of finance costs not deducted in calculating the profit. In practice this tax reduction will be calculated as 20% of the lower of the:

  • finance costs not deducted from income in the tax year (25% for 2017 to 2018, 50% for 2018 to 2019, 75% for 2019 to 2020 and 100% thereafter)
  • profits of the property business in the tax year
  • total income (excluding savings income and dividend income) that exceeds the personal allowance and blind person’s allowance in the tax year

Any excess finance costs may be carried forward to following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year.

Tax when you sell property

. . .

Deduct costs

You can deduct costs of buying, selling or improving your property which reduce your gain. These include:

  • estate agents’ and solicitors’ fees
  • costs of improvement works, eg for an extension (normal maintenance costs don’t count, eg for decorating)
Reliefs

You may get tax relief if the property was:

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Also interesting to note:

Just to clear up one further point, if the property falls in value (or stagnates) the equity financier charges only 2.5% per annum for their loan. That’s only paid when the property is sold or refinanced. Now that’s very cheap money compared to traditional mortgage funding!

http://www.property118.com/85-percent-ltv-buy-to-let/69350/

So the lender gets twice their share (in equity terms) of the capital gains OR 2.5% compound interest, whichever is the higher.

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The thing that caught my attention was the sheer aggressiveness of such borrowing, one might perhaps go so far as to call it reckless, were one so minded. I can't see why it should in any way reduce your CGT liability. The matter of how you financed holding the asset has no bearing on the CGT charge.

The equity finance company named in the Guardian piece are offering very attractive rates on their 1 year fixed rate bonds, though there are pretty clear statements all over the webpage about the effect of any potential insolvency on the return of your money. I have some questions about a business model of borrowing at 2.5% in order to lend at 2.5%, but I am sure there are perfectly sensible answers to all of them. I am in fact massively comforted by all these references to Castles and Fortresses. Should be safe as houses.

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The minimum amount of equity finance is £10,000 per property and the combined LTV across the mortgage and the equity finance must not exceed 85% of the current value of the property.

. . .

You may be wondering why I underlined the word consider at the beginning on this article. This is because it is not a given that your mortgage lender will allow a second charge. For example, The Mortgage Works will need to be convinced that your existing LTV is below 65%. If this is the case due to your property having appreciated in value, then TMW will want to see a new valuation report to confirm that. Other lenders may want to be clear that you understand the transaction that you are entering into. This might be due to you having say 15 years on your mortgage with them, but the equity financier wanting their return in 10 years time, either from the sale or refinance of your property.

http://www.property118.com/85-percent-ltv-buy-to-let/69350/

Given the compound interest rule sets a lower limit on how much the lender will expect to be repaid over and above the principal sum lent, and assuming the first charge (i.e. the original buy-to-let finance) sits around the 65% LTV mark, it looks to me like leveraging up to a supposed 85% LTV in this manner actually takes the effective LTV to in excess of 90% in the event of a stagnant, let alone falling, market. Barely worth considering, of course ;)

House_price_heat_m_2903170c.jpg

http://www.telegraph.co.uk/finance/property/house-prices/10812771/House-price-heatmap-its-still-winter-in-the-regions.html

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The thing that caught my attention was the sheer aggressiveness of such borrowing, one might perhaps go so far as to call it reckless, were one so minded. I can't see why it should in any way reduce your CGT liability. The matter of how you financed holding the asset has no bearing on the CGT charge.

That's what I would have thought, so it's like voluntary giving up the tax relief on interest payments in acknowledgement that they can't actually afford the interest payments at all even with the current tax relief, and then hoping desperately to get bailed out by an increase in prices and a continued favourable lending environment that allows them to remortgage, because they definitely can't afford to sell and crystallize the capital gains tax because they can't afford to pay that either. Madness.

The equity finance company named in the Guardian piece are offering very attractive rates on their 1 year fixed rate bonds, though there are pretty clear statements all over the webpage about the effect of any potential insolvency on the return of your money. I have some questions about a business model of borrowing at 2.5% in order to lend at 2.5%, but I am sure there are perfectly sensible answers to all of them. I am in fact massively comforted by all these references to Castles and Fortresses. Should be safe as houses.

I expect this will be the calibre of their response to the reality of the situation once it hits home :P

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...Tangentially, as I understand matters from the author of the piece at the link, before the buy-to-let investor can be granted the equity finance, which results in a second charge on the property, the mortgage lender who provided the first charge mortgage must allow the second charge. Helpfully the author also produces a list of lenders who are, in his opinion, amenable to allowing the second charge equity finance.

The Mortgage Works

[snip]

I am really starting to settle on the idea that what we have had since 2003 is a buy-to-let bubble, and it is being burst. The lenders and their fellow travellers have staked a lot of money on this bubble, it will be interesting to see whether or not they can be made whole by the disposal of the properties, should the need arise. I may be being overly pessimistic, but then I cleave to the idea that a UK bank is best understood as a large organisation run in the interest of its executives which uses mortgages secured on residential property to lend too much, and then explodes.

TMW reduce Buy to Let rates to the lender’s lowest point

The Mortgage Works (TMW) have reduced their Buy to Let mortgage rates by up to 0.5% on some products leaving their product range with some of the lowest headline interest rates ever.

Fixed rates are available starting at 2.19%

Variable rates starting at 1.94%

Fee free 65% LTV two-year fix at 2.99%

3 Year fixed rates starting at 2.69% with a new £1,995 flat fee option for 65% LTV

5 Year fixed rates starting at 3.29% with £1,995 flat fee for 65% LTV

Paul Wootton head of specialist mortgages said “This new range of competitive buy-to-let fixed rate and tracker mortgages provide landlords with TMW’s best-ever rates and continue to demonstrate our commitment to our customers and intermediaries.

“With a likely Bank base rate rise on the horizon, TMW’s competitive range of fixed rate products offer longer term payment security for landlords, particularly for those with larger deposits looking to maximise their cashflow.”

time-bomb-o.gif

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Purely speculating but perhaps they're looking to tempt borrowers in before reeming them on post-Basel III SVRs?

The way I understand matters is that when the banks move their rates it's generally them chasing market share and internal targets this year and thus can be ludicrously short term.

Thoughts about the fact that they may well be murdering these customers by 2017-2020 never enters the analysis. It is certainly quite striking that Carney appears to have got the chess board lined up so that he can use BCBS risk weightings to end buy-to-let for good by pushing BTL lending rates into credit card territory (and I don't mean the 0% teaser rate on a credit card, I mean the default APR of 18%) and this fact hides in plain sight on the CML website and yet still the banks lend today at comedy low rates. Bonkers.

Still BTLers, please pile in. I will in due course be bidding against you for a house (when the bank takes your nice big one from you after the BTLs blow up) and I'd rather you squandered any bubble equity treasure chest you've acquired so that somewhere down the line we can compete on the basis of earnings and savings.

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