Mortgage Loan Deal Helps Landlords With Tax
Mortgage Loan Deal Helps Landlords With Tax
In the past, I have regularly criticised the mortgage companies for not exactly being innovative, though in recent years, new entrant players like Aldermore, Paragon and Kent Reliance have increasingly shown the more established lenders the way ahead with new innovative products that meet the needs of the modern landlord.
So, I am very pleased to see a new mortgage loan deal that has just come out that actually helps landlords to reduce tax.
It is from the Leeds Building Society, who are the first lender to suggest that landlords might choose a mortgage deal that has a high upfront fee and a low interest rate as a smart way of making the most of tax relief on finance costs before the “Section 24” changes, (which affect how loan costs can be deducted from rental income for tax purposes), start to bed in.
A Quick Recap! – Section 24
First, a quick reminder for those who have been asleep at the back!
Landlords used to be able to deduct mortgage interest and other finance costs, including product fees, from rental income before calculating how much tax they should pay. But the government is phasing out this tax relief over four years to 2020-21. By 2020-21, landlords will only be able to claim a 20 per cent basic rate relief reduction on finance costs.
The Leeds Mortgage Loan Deal
High fee products enable landlords to front load funding costs and maximise the use of existing tax relief, whilst minimising the interest payable in future years when tax relief is going to become less favourable.
The lender charges £2,499 for a two year fixed rate loan at a low interest rate of 1.44 per cent for a mortgage up to 60 per cent loan to value, or 1.69 per cent if the loan to value is 70 per cent. Maximum loans are £500,000.
Mortgage Loan Deal Helps Landlords With Tax – Other Situations
There are other situations too where this kind of deal could work well.
Take a person who is going to retire in a year or two and then fall into a lower income tax bracket, she could also use the opportunity to maximise use of the tax relief before it tapers away. The lower interest rate would later help her sustain profits.
In another case, a landlord who was expecting to refurb a property might sign up for a high-fee deal in order to maximise his mortgage interest (and fee!) relief until 2020-21, but delay work on the property, since refurbishment remains tax deductible.
All in all, a smart move from the Leeds. I just hope the regulators and HMRC don’t start to say that the lenders are gaming the tax and regulation of mortgage systems.
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