Over the years there have been a variety of different mortgage types that have fallen in an out of favour as economic and market conditions have changed. The questions now facing landlords about interest only mortgage tax relief stem from the changes that started to come into effect in April 2017.
With an interest-only mortgage, you only pay interest to your lender each month. At the end of the mortgage term you will still owe the total amount originally borrowed. In a regular mortgage you will need to make a separate arrangement, called a “repayment vehicle” to repay the capital. This usually means another monthly payment into a suitable investment. With a buy to let mortgage there is often no repayment vehicle as they use the rental income to cover the monthly interest. Many landlords see buy-to-lets as a long-term investment. They plan to sell the property in the future and make a profit from any house price inflation, as well as repaying the capital owed. The main benefits to interest only mortgages for landlords are flexibility and until recently tax efficiency,
Under the old tax system, you would only pay income tax on your net rental income, or profits. You would first deduct the interest from the mortgage on your rental property, as well as any other expenses incurred throughout the year. With the many landlords being on interest only mortgages, this meant that in practice they could claim the entire mortgage repayments. By April 2020 you won’t be able to do this and will have a new tax credit that is far less generous. The changes may also lead to some being pushed into the higher rate tax bracket, or losing means tested benefits.
So where does that leave the interest only mortgage? The lower overheads they provide can be a and advantage when you are trying to expand your portfolio and finance other properties. Some landlords have used rising property values to release equity from their properties by re-mortgaging, subject to a minimum loan-to-value calculation, then investing it in new properties, sometimes referred to as ‘leveraging’. According to Estate Agents Savills, UK house price growth is set to slow by half over the next 5 years. This may leave you without the cash you need to clear the loan when you need to. Having said that most landlords are in for the long term and expect to ride the changes in the property market.
If you enter an interest only mortgage with your eyes open, then an interest only mortgage may still be suitable for you. The changes in tax relief and the associated certainly make this a good time to review the mortgage arrangements for your portfolio. I hope this is helpful and helps to make an informed decision about the best type of mortgage for your situation. I am always happy to review your specific circumstances so get in touch if you need some advice.