Mortgage lending for buy-to-let rose 26% to £15.6bn in 2015 according to the Council of Mortgage Lenders (CML)
Landlords are borrowing record levels of mortgages up 26% year on year 2015 to 2014 the highest since the crash in 2008. In 2007 lending hit £23.1 billion. These record levels are driving up house prices and preventing first time buyers getting a foot on the housing ladder.
However Landlords will be in for a shock when new tax laws come into effect in 2017 where interest payments from mortgages will not be allowed to be offset against income driving up tax bills and lowering profits. The full effect of this new law will be phased in but many landlords are unaware of how this will effect them.
For example take a landlord with a £200,000 property and a 75% buy to let mortgage. Assuming the rental yield was 6% the income would be £12,000 and assume the mortgage rate was 3.5% on £150,000 the mortgage interest costs would be £5250 leaving a profit of £6750 and after 40% tax the profit in the landlords pocket would be £4050.
Now take the same scenario under the new tax rules. The rental income is £12,000 but no mortgage interest can be used to offset the tax. So the landlords will pay 40% tax on £12,000 i.e. £4800 plus their mortgage interest costs still at £5250. So the profit in the landlords pocket will be £12,000 minus £4800 minus ££5250 = £1950. Taking out other costs such as letting agents fees and wear and tear will result in a loss for most landlords.
Landlords must act now to ensure they do not get caught out when the new tax laws take effect.