October 5, 2020
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April is a big month for the buy-to-let landlords and their finances.
Many landlords are looking at their buy-to-let mortgages and wondering if they can help cover the costs of new tax relief changes, new compulsory energy efficiency regulations and new capital gains rules.
Let's take a look.
In the past, borrowing with a buy-to-let mortgage offered tax advantages. You could deduct your financial costs from their rental income and the profit was taxed at their marginal rate. Now, the amount landlords can 'offset' has been drastically reduced.
Since April 2017, tax relief on mortgage interest has been gradually phased out. Now, in April 2020, you won't be able to deduct any of your mortgage expenses from rental income to reduce your tax bill. Instead you'll get a 20% tax credit on interest payments.
Here's an example of what a landlord on a higher rate of income tax has 'taken home' after mortgage and tax payments over the past 4 years. This is based on a monthly rental of £950 and a buy-to-let mortgage repayment of £600.
A landlord in the 20% income tax bracket from April 2020 will take home:
Because of the changes to tax relief over the past few years, profit margins in buy-to-let have become slimmer, making it really important to do a full comparison of buy-to-let mortgages, and make sure you are not paying anymore than you need to.
In April 2018, all rental properties with new tenants or new tenancy renewals have been required to have a minimum rating of E on the Energy Performance Certificate (EPC).
From April 2020, this will be extended to cover all existing tenancies, meaning that every landlord needs to make sure their buy-to-let properties are energy efficient enough.
There are some energy efficiency tips here, but if your property still has an EPC rating of F or G after April 1st 2020, it is now classed as unrentable.
Landlords will never be asked to spend more than £3,500 in energy improvements, and having spent that amount, if the property still doesn't achieve an E rating, they can get an ‘all improvements made’ exemption.
In the past, Private Residence Relief (PRR) has enabled buy-to-let landlords to be partially exempt from Capital Gains Tax (CGT).
PPR allowed landlords to be exempt for all the time they had previously lived in the property, plus an extra 18 months after moving out. So it was really useful for 'accidental landlords'.
From April 2020, this will be cut to the time lived in their property, plus 9 months, in effect losing landlords 9 months of CGT relief.
Furthermore, previously you could get CGT relief of up to £40,000 and £80,000 for a couple if you had lived in the property prior to letting it.
Now, from April, this rule will be changed to apply to only landlords who are in shared occupancy with their tenant.
Buy to let mortgages are landlords' main expense, so any savings you can make by remortgaging can help dramatically.
This is especially true for landlords who have been in fixed mortgage deals for a while. Since 2015, the average buy-to-let mortgage rate has dropped by 1.19%, which equates to a remortgage saving of around £1,947 a year on a loan of £250,000.
Many fellow landlords have been reassessing their mortgages. December 2019 figures from UK Finance show buy-to-let purchase completions rose by 3.6% to 5,700 and buy-to-let remortgages saw an annual rise of 2.3%.
Any landlord struggling with cashflow due to coronavirus has been advised to get in touch with their mortgage lender and set up a mortgage relief period.
Here's a few other articles you may find useful.
Thinking about buy-to-let? you'll find everything you need to know right here - from investment potential to mortgage applications.
It's an option that could end up saving you thousands. Especially if you are looking to grow your portfolio. Can you get a mortgage as a ltd company?