Since the introduction of specialist landlords’ mortgages in 1996, there has been an explosion in people buying rental properties using Buy-to-Let mortgages.
Many of our clients have rental properties, and the majority have used a Buy-to-Let mortgage to help buy these.
We’re often asked whether it would be beneficial to repay these mortgages, either by:
· Over-paying the mortgage using rental profits
· Using savings to clear the loan
· A combination of both
By reducing or repaying the mortgage you will save on the interest you pay as the loan amount gets smaller. This could have a dramatic effect over the lifetime of the mortgage and will increase the amount of profit you receive.
You should check with your mortgage lender that they will accept over-payments or early repayment, and make sure you keep within any over-payment limits because penalties could apply if you pay more than the lender’s limit.
Changes in tax rules
As of April 2020, landlords are no longer able to deduct any of their mortgage expenses from rental income to reduce their tax bill.
Instead, they’ll receive a tax-credit, based on 20% of their mortgage interest payments.
This means that basic-rate taxpayers are unaffected, but higher- and additional-rate taxpayers will now pay significantly more tax on their rental income.
So higher- and additional-rate taxpayers could benefit from paying down their BTL mortgages.
Over-paying the mortgage using rental profits
You could consider over-paying your BTL mortgage using the profits you receive on the rental income.
Depending on the rules of your lender, you could do this on a monthly basis or at set intervals during the year.
Make sure you take tax into account – rental income is received gross of tax, so work out what the net profit is (after allowing for tax), and only over-pay by this amount
Using your savings to reduce or clear the loan
If you have savings available that are not required for your emergency fund or other capital expenditure, you might consider using these funds to reduce or pay off your BTL mortgage.
Speak to your lender to check how much you can pay off without paying a penalty and avoid paying off more than this amount.
Assuming you can repay without penalty, this could provide good value for money, because the interest rate on your mortgage is almost certainly going to be higher than the amount of interest you receive on your savings.
The content of this article is for your general information purposes only and does not constitute advice. It does not contain all of the information which an investor may require in order to make an investment decision. Obtain professional advice before making any financial decision.
The value of tax benefits described depend on your individual circumstances. Tax rules can change. The Financial Conduct Authority does not regulate buy-to-let properties or tax advice.