Linking a savings account to a home loan may be a wise move if a buy-to-let property is only borderline profitable
Landlords squeezed by tougher tax rules could use offset mortgages to manage their money, according to mortgage brokers.
Many landlords are facing increased tax bills since the ability to claim all of the mortgage interest as a tax-deductible expense was removed in April. This tax year you will be allowed
to deduct 75 per cent of your mortgage interest from your rental income before paying tax. This will taper down to 50 per cent in the 2018-19 tax year and 25 per cent in 2019-20. In 2020-21 landlords will not be able to claim any of the mortgage interest as an expense. The amount of tax relief is also being restricted to the basic rate of 20 per cent from this tax year.
An offset mortgage, which is where you put a lump sum into a savings account linked to the mortgage, can help to mitigate the blow of a higher tax bill.
With an offset mortgage interest from savings goes to reducing the interest rate on a mortgage, so a landlord has a lower monthly payment to make. This means more rental income is left over each month to put aside to pay the tax man.
Paul Elliott, the head of specialist lending at John Charcol, a mortgage broker, says: “This a better way of using your savings and it puts you in a better position to pay your tax bill, particularly for landlords who are on the borderline of whether the property is profitable or not.”
He highlights the Family Building Society’s buy-to-let offset mortgage, which has interest rates starting at 2.99 per cent on 65 per cent loan to value. The minimum amount of money that can be offset is £100 and the product has a £999 fee.
Some offset mortgages can also allow you to reduce the loan’s term instead. Your savings held in the linked account reduce the amount of mortgage interest, so your monthly payments go more towards paying off the capital. The Hinckley & Rugby Lifetime discounted variable buy-to-let mortgage does this. It could be useful for people who are using the property for retirement income, as they would make far more from the investment if there was no mortgage.