Mortgage References – Let’s stick to the Facts

Generally mortgage lenders will accept references from

Accountants are constantly asked to give income and mortgage references, factually reporting filed information is fine but why ask accountants to forecast the future or state if the client can afford the payments, no accountant should be asked these questions!

… under the rules of the Institute of Chartered Accountants for England and Wales (ICAEW), the ICAEW specifically precludes firms from providing anything except factual information in response to such requests. Firms are also restricted in relation to provision of information of this kind by our public indemnity insurers. This is because of the risk to the firm of the information being used to support a lending decision, and the potential for us to be contractually obligated if the lending provided is not subsequently repaid. This is also the reason that reference requests are not charged for by ICAEW member firms. https://www.rileyandco.co.uk/2017/05/04/whats-problem-mortgage-references/

Accountants who think they can do references as a one off for clients they don’t act for need to beware, they could be disciplined, back in 2014 ICAEW disciplined and fined one of their members £3,500 for a reference prepared in this way https://www.accountingweb.co.uk/practice/general-practice/accountant-banned-for-reckless-mortgage-references

No one knows your business better than you do, so why don’t mortgage providers just ask the their client to give the forecast? why ask the accountant? We can’t be held responsible for the future of our clients!

Let’s stick to the facts!

steve@bicknells.net

Can I claim mortgage fees against property profits and reduce my tax?

Yes you can! if you are property investor you can offset mortgage fees

The rules are in Income Tax (Trading and Other Income) Act 2005

Section 58

Incidental costs of obtaining finance
(1)In calculating the profits of a trade, a deduction is allowed for incidental costs of obtaining finance by means of—
(a)a loan, or
(b)the issue of loan stock,
if the interest on the loan or stock is deductible in calculating the profits of the trade.
(2)“Incidental costs of obtaining finance” means expenses—
(a)which are incurred on fees, commissions, advertising, printing and other incidental matters, and
(b)which are incurred wholly and exclusively for the purpose of obtaining the finance, providing security for it or repaying it.
(3)Expenses incurred wholly and exclusively for the purpose of—
(a)obtaining finance, or
(b)providing security for it,
are incidental costs of obtaining the finance even if it is not in fact obtained.
(4)But the following are not incidental costs of obtaining finance—
(a)sums paid because of losses resulting from movements in the rate of exchange between different currencies,
(b)sums paid for the purpose of protecting against such losses,
(c)the cost of repaying a loan or loan stock so far as attributable to its being repayable at a premium or having been obtained or issued at a discount, and
(d)stamp duty.
(5)This section needs to be read with section 59 (which provides for restrictions in relation to convertible loans and loan stock etc.).

steve@bicknells.net

Do you have any cash in reserve? 6m UK families don’t!

I was watching the BBC news this morning and in the Reality Check report they were talking about Debt.

Obviously the biggest amount of debt is mortgages and compared to other countries we are close to the average for Debt.

But its not just an issue for families its an issue for businesses too. We often work with landlords and typically their net cash flow out of the rent received is 2% or less.

That’s the Rental Income less mortgage interest, expenses and tax.

Landlords tend to be asset rich and cash poor, liquidity is vital to cover even minor problems such as repairs and void periods. It is of course easier to have liquidity with a bigger portfolio.

Landlords are facing many problems at the moment not least the Section 24 Interest Restrictions which start this year. This will mean large numbers of landlords with high Loan to Value ratios will have negative cash flow and if the sell they face 18% to 28% capital gains tax (as buy to let get an 8% penalty).

I wonder how many landlords have the resources to handle negative cash flow, how long could they cope what are their contingency plans?

The Lenders and Bank of England have anticipated this problem and for sometime now have tightened the lending rules coverage is now 145% for personal borrowers, but its still 125% for companies as they are aren’t affected by Section 24.

Now is the time to work on your strategy!

steve@bicknells.net

When is Mortgage Interest a tax allowable expense?

what

There are ways that you can claim tax relief for your mortgage interest.

Qualifying Loan Interest Relief

Often when you start a business you will need to borrow money personally to lend to your new company or buy shares.

You might borrow by increasing your mortgage.

You may be entitled to claim tax relief for interest paid on a loan or alternative finance arrangement used to buy:

shares in, or to fund, a ‘close’ company (contact your HM Revenue & Customs (HMRC) office if you are not sure if the company is ‘close’)
an interest in, or to fund, a partnership
plant or machinery for your work (but make sure you do not claim this interest twice, you will do if you have already deducted it as a business expense)

If you receive a low-interest or interest free loan from your employer for one of the above purposes you may be able to claim relief for any benefit taxable on you.

This is called ‘Qualifying loan interest relief’, HMRC have a helpsheet which gives further details HS340

Property Investors/Buy to Let

At the moment property investors can also offset mortgage relief against their profits but the rules are changing.

2017/18 75% of the interest can be claimed in full and 25% will get relief at 20%

2018/19 50% of the interest can be claimed in full and 50% will get relief at 20%

2019/20 25% of the interest can be claimed in full and 75% will get relief at 20%

2020/21 100% will get only 20% relief

For a 20% tax payer that’s fine but for higher rate taxpayer its a disaster that will lead to them paying a lot more tax

These rules will not apply to Companies, Companies will continue to claim full relief.

How much can you borrow?

In summary if you re-mortgage above the original market value and you own the property personally and take out the cash you will not be able to claim relief from interest on the part above the original market value

If however you borrow to invest in another property that is ok.

steve@bicknells.net

Will ‘Help to Buy’ cause a housing market boom?

Help to Buy was due to start in January 2014 but it’s been brought forward to start this week.

Here is a link to the 2013 Budget Info Graphic explaining how it works (the rules have been changed a little but it’s a good outline) – HM Treasury

Here is David Cameron announcing the scheme on the BBC on Sunday 29th September

A Help to Buy mortgage guarantee lets you buy a newly built home or an existing property with a deposit of only 5% of the purchase price.

Help-to-Buy will initially be available under the Nat West, RBS and Halifax brands.

Help to Buy mortgage guarantees will be open for loans not only to first time buyers but also to existing homeowners, and be available on new and existing houses with a value of up to £600,000. Buyers must have a 5% deposit.

The Government will guarantee the next 15% of the loan for a fee.

The Help to Buy mortgage guarantee will increase the supply of high loan-to-value mortgages.

The plan has drawn criticism from the International Monetary Fund and Business Secretary Vince Cable, who say it may spark a property bubble.

What do you think?

steve@bicknells.net