Tax rises create mortgage trap for high earners

A lethal cocktail will hit leveraged borrowers at the top of the market, reports Melissa Lawford

Wealthy homeowners could become forced sellers as company directors battle a lethal cocktail of tax rises that will hammer their borrowing power.

Higher tax rates on dividends introduced this year and corporation tax rises coming in 2023 will force a “sea change” in affordability for selfemployed borrowers, mortgage brokers have warned. These high-earning buyers may become unable to remortgage or face being barred from borrowing what they previously could.

Graham Cox, of the Self-Employed Mortgage Hub, a specialist broker, said: “The tax changes will make it tougher for company directors to get mortgages. The corporation tax rises will be a big sea change.”

In turn, this will trigger house price falls at the higher end of the housing market, he warned. “People can’t borrow as much, so they can’t offer as much, and that is when prices come down.” He forecast that values will start to fall in the second half of this year.

Lenders typically offer mortgages to self- employed borrowers based on 4.5 times their salaries and dividends, or their salaries and the company’s posttax profits. But a succession of tax rises are hitting incomes taken in these ways.

On April 6, the Government raised tax on dividends by 1.25 percentage points. This comes on top of the 1.25 percentage point National Insurance rise, which will bring a further hit to companies’ post-tax profits via higher employer contributions.

Then, from April 2023, the corporation tax main rate will be increased from 19pc to 25pc. Companies with profits of £50,000 or less will continue to pay corporation tax at 19pc, while those with profits of between £50,000 and £250,000 will pay at the main rate reduced by reliefs on a gradient.

Borrowing power will be hit at the same time that mortgages will get significantly more expensive, as the Bank of England raises interest rates in response to rapid inflation. Research consultancy Capital Economics has forecast that mortgage rates will average 3pc next year, following a rise in the Bank Rate to 2pc.

Lewis Shaw, of the mortgage broker Shaw Financial Services, warned that homeowners at the higher end of the market could be forced to sell up.

“It will hit people with higher incomes,” he said. “People at the top end of the housing market are often self-employed company directors. When corporation tax rises and they want to remortgage, their net income will be lower.

“All of these factors spell trouble for people who are highly leveraged. If things get bad, they might not be able to remortgage.”

Mortgage rates will still be relatively low historically, but the contrast to the record low rates seen during the pandemic will be huge. “Rates were at sub 1pc, now they are at 2pc. They have already doubled,” added Mr Cox.

Homeowners who purchased properties in the past few years with ultracheap mortgage rates, while paying less tax on their income – which meant they had higher incomes in the eyes of lenders – will be in a “radically different” situation if they try to remortgage next year, said Mr Cox.

The affordability crunch will hit harder because high house price growth and a shortage of homes in the wake of the pandemic meant buyers stretched themselves. “People have been borrowing to the maximum of what they can because prices are so high,” said Mr Cox. “These directors are leveraged up to the hilt.”

House price growth in March hit an 18-year high of 14.3pc, according to Nationwide Building Society. Home values have increased by 21pc since the start of the pandemic.

At the same time, all borrowers will be grappling with rapid increases in their outgoings due to the cost-of-living crisis.

Petrol prices have hit record highs, just as energy prices have surged following the 54pc rise in the energy price cap this month. A further rise is anticipated in October. Inflation, which the Bank of England has warned will hit 10pc this year, will further eat into disposable earnings.

The dividend tax rise means that a person earning a £8,840 salary plus dividends up to £50,270, just within the basic rate threshold, pays an extra £446 in tax, according to analysis by Cowgills accountants.

Dividend earnings within the higher tax bracket, from £50,270 to £150,000, are now taxed at 33.75pc, up from 32.5pc. A person with the maximum earnings in this bracket now pays an extra £1,247 in tax. Additional rate tax payers now face rates of 39.35pc.

Tax rises will hit company director borrowing power by 8pc