The Times They Are A-Changin'
You may or not be aware that as of 1 April 2016 the stamp duty land tax (SDLT) on second homes and buy to let purchases will be increased by 3%. If that wasn’t enough for landlords, the government has also announced that as of April 2017 the tax relief claimed by landlords on their financial costs will be capped at 20%, instead of the higher rate of 45%, which will be phased out over the following years.
Chancellor George Osborne also added that the current ‘wear and tear’ allowance afforded to those letting out furnished property would be scrapped and replaced with relief against the cost of replacing furnishings. With so many changes all within a small time frame, it has created a complicated scenario for many landlords, who may be seeking the financial guidance of an adviser to ensure they make the right decisions.
In an effort to curb incentives for housing investment, the government has introduced the changes to “level the playing field” between landlords and first-time buyers. This has caused some controversy within the industry as some feel the changes are unfairly targeting landlords when the housing crisis is also affected by many other factors.
Some landlords are even considering incorporation and setting up a limited company to apply for their mortgages, to ensure their portfolio remains as tax efficient as possible. But this is a complicated area and these changes will affect each landlord differently. That is why talking to us and your accountant, will help prepare you for and deal with the changes.
You will no doubt also start seeing news relating to The Mortgage Credit Directive (MCD). I thought you may find it helpful if I provide you with a short summary of the changes that will affect the mortgage market.
In essence, the MCD introduces a European framework of conduct designed to foster a single market for mortgages and to protect consumers. The rules became effective on 21st March 2016 and in the absence of any transitional rules, all ‘new agreements’ entered after this date will need to be MCD compliant. As a result, lenders will be reviewing pipeline mortgage applications and ensuring that where required, additional disclosure is given to customers and additional protection is included. Other changes resulting from the MCD include an additional category of regulation: Consumer BTL, restrictions on scope of service and second charge lending becoming regulated under Mortgage Conduct of Business rules.
What are the main changes?
Key Facts Illustration replaced by ESIS (or ‘KFI plus’)
From the 21st March 2016 all consumers receiving advice will need to be provided with either a European Standardised Information Sheet (ESIS) or ‘KFI Plus’ prior to an application being made. Lenders can choose to replace the current Key Facts Illustration with the ESIS/KFI Plus as early as September 2015. If lenders choose to adopt a KFI Plus from March 2016 they will have until March 2019 to move across to an ESIS.
Where a consumer is classed as an 'accidental landlord' they will fall under specific FCA regulation in relation to consumer Buy to Let. This will apply to consumer who have 'not entered into a Buy to Let arrangement wholly or predominantly for business purposes.' This could include a customer who inherits a property from a deceased relative or undertaking a ‘let to buy’ transaction.
Alternative Finance Options
Second charge lending will come under the FCA's rules from 21st March 2016, and will need to be considered for anyone seeking to remortgage their home.
Binding offers and reflection periods
Lenders will be required to issue binding offers to customers. These cannot be withdrawn by lenders unless there is a material change in the facts surrounding the case. In addition, a new seven day 'reflection period' will be introduced, which will start on the issue of the binding mortgage offer.
Currently intermediaries can refer to themselves as being ‘independent’ if they have access to a panel that is 'representative of the whole of market'. Under the Mortgage Credit Directive to be ‘independent’ firms will have to have 'unlimited' access to the market for first and second charge lending. This will not be achievable for many firms as they currently stand. Promotions will also no longer be able to imply independence for mortgage activities so terms similar to 'independent' such as 'impartial', 'unlimited access' or 'whole of market' will possibly start to disappear.
If you have any queries on anything in this blog, please do not hesitate to contact us as we will be happy to help.