Tax Advantage to Higher Loan to Value Buy to Let Mortgages

by Socbot on February 14, 2013

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The rental industry has grown from strength to strength in the last few years are more and more people resort to long term renting. The private residential lettings market in the UK is big business – and its look set to continue well in to 2013/2014.

Record low mortgage interest rates and high rental yields ensures good profits can be made by landlords who invest wisely. Property investors with access to funds or mortgages are well placed to snap up below market value properties – with little competition from first time buyers as they find it increasing difficult to save up the deposits required for first time buyer mortgages.

Many landlords (even small scale landlords with only a few properties) have realised this is the optimum time to expand their portfolios, and there are great tax advantages in doing so.

Income from rent is of course taxable as profit. However, there are a number of expenses which can be directly deducted from the rent. The obvious ones are your property maintenance and routine safety requirements, letting agency fees (if you use one) and costs associated with any legal work required.

Mortgage interest can also be deducted against the rental income (note: this is only the mortgage interest element of your mortgage payment which may also include a standard repayment element, your mortgage statement will show the details of how much is interest). So clearly, the higher the loan to value, the higher the amount of interest you are going to be paying, and the more you can deduct off the rental income.

So consider for a moment the two extremes,

Case 1, you own outright a property which is let for £750 per calendar month, and Case 2, a property mortgages with an 80% buy to let mortgage which is also let for £750 per calendar month.

In the 1st case, there will be no mortgage interest to deduct from the rental income, but in case 2 there will be a significant (if the mortgage is in the region of £100k and the interest is in the region of 4%, then the monthly interest is going to be well over £300 per month).

See HMRC: http://www.hmrc.gov.uk/manuals/pimmanual/PIM2105.htm

Landlords considering expanding their property portfolio could also benefit by combining all the buy to let mortgages in to one single buy to let portfolio mortgage account – this may enable you to release more equity to invest in additional property purchases.

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