The second phase of the UK Government’s Help to Buy scheme has started to be rolled out earlier this month although it only becomes active in January 2014.
Although on the surface the two phases of the scheme seem similar, there are some important differences that need to be borne in mind.
The original phase of the scheme was open to both first-time buyers and home movers but only on new-build homes worth up to £600,000 but was on an equity loan basis. New-build homes are defined as a property being sold for the first time or for the first time in its current form so, for example, a house newly converted to flats would be deemed a new-build. If the person has at least a 5% deposit, the government provides a loan of up to 20% leaving up to 75% to be covered by a mortgage.
The second phase is still open to all but on any property worth up to £600,000 as long as it is not a shared ownership or shared equity purchase, a second home or rented out. However this is a guarantee scheme rather than a loan.
If the person has at least a 5% deposit, the government provides a guarantee of up to 20% of the mortgage to the lender but it still means that up to 95% of purchase price has to be covered by a mortgage.
This distinction raises a number matters to consider to be able to fully benefit from the scheme. Firstly, the property itself has to qualify for a 95% mortgage and, in a bizarre incongruity, both first-time buyers and new-build homes usually don’t qualify!
Secondly, the person has to have the necessary income to cover the mortgage. Bearing in mind that in London the current average house price in London is £437,000 and with the mortgage lenders in the main limiting the amount they lend to four times a person’s income, to meet their criteria for a 95% mortgage on an average house in London, the buyer will need an income in excess of £100,000.
Finally, there are only a limited number of lenders – NatWest, Royal Bank Scotland, Bank of Scotland and Halifax – currently supporting the scheme. As a result, although the interest rates at around 5.0% are about 0.5% below their existing rates on 95% mortgages, there are more competitive interest rates offered outside the scheme.
Overall, for the first-time buyer, in London and the South-East especially, the value and opportunity remains in the original phase of the scheme.
For the investor, the Help to Buy scheme is not an appropriate vehicle. However, with house prices and rental values on an upward trajectory, Buy-to-Let property is an attractive investment proposition.
However, the HMRC are targeting tax avoidance in this area through their Let Property Campaign which is offering landlords who have not declared their rental income a window to come forward settle without incurring penalties that could be up to 100% of tax due.
All rental income from letting out a residential property or a holiday home in the UK or overseas has to be declared to HMRC for income tax purposes, even if it is just a single property. The HMRC have a database of information about property and are working on identifying people who have not paid the tax due.
A Buy-to-Let property can be owned by an individual or a company.
If it is owned by an individual, the income must be declared through a Self-Assessment Tax Return.
The day-to-day running costs of the property can be claimed against the rental income that will reduce the tax due. These costs include:
– the letting agents’ fees.
– legal fees for lets of a year or less or for renewing a lease for less than fifty years.
– accountants’ fees.
– buildings and contents insurance.
– interest on property loans.
– maintenance and repairs to the property (but not improvements).
– ground rent and service charges.
– services paid for by the landlord such as cleaning or gardening.
– other direct costs of letting the property such as phone calls, stationery and advertising.
The purchase of the property together with any renovation costs are not offset against the rental income but would be included when the property is sold against any resulting Capital Gains.
If the Buy-to-Let property is owned by a company, the rental income would be treated in the same way as any other business income with the day-to-day running costs of the property treated as business expenses.
Escalating property prices in London is impacting the yield from Buy-to-Let property which currently average 4% against the 6-7% across the country as a whole.
In considering whether a Buy-to-Let property is a suitable investment vehicle, a judgement has to made whether to prioritise the higher monthly income that a regional city may offer or the capital growth that London looks set to continue to offer with the seemingly endless pressure on the housing supply.
Ultimately, as with any other personal or business investment decision, the level of risk has to be balanced against the potential rewards together with the time demands that administering the property will make.