Can a Simple Home Loan Save Buy-to-Let?
In a few short months, buy-to-let investors are going to be faced with a stark new reality that will hit them where it hurts most. Beginning with the 2017 tax year, landlords will no longer be able to deduct interest on their buy-to-let mortgages as a business expense. Any money they spend on interest will be considered income and will, therefore, be taxable. This has left many landlords looking for ways to reduce the cost of their mortgages, including the possibility of reducing what they spend using a simple home loan.
The idea is to use one's primary residence to raise the funding necessary to pay down landlord debt. For example, consider a buy-to-let investor with Â£700,000 in mortgages on his rental properties and a primary residence, which he owns mortgage-free, valued at Â£500,000. He could take a home loan against his primary residence and apply the money to his buy-to-let mortgages. That would reduce the total amount he owes on those properties, thereby reducing the amount of money he's spending on interest.
Releasing Equity with a Home Loan
The strategy described here is essentially one of releasing equity in your primary residence to try to reduce the cost of being a landlord. Whether it proves successful for a lot of landlords or not remains to be seen. The problem is that even with the new home loan, they will be paying mortgage interest. Clearly, there is a benefit in that doing business as a landlord instantly becomes less costly and therefore increases profits, but starting over with a new mortgage after one's primary residence is paid off has its own downsides.
There is another option if the landlord does not want to involve his primary residence in financing his buy-to-let business. That option is to try to remortgage the rental properties at a lower rate. The process itself is no different than getting a new home loan on a primary residence. It just requires a little bit more effort because you're dealing with rental properties.
Remortgaging rental properties at a lower rate reduces the costs of being a landlord in the same way taking a home loan on your primary residence. The advantage of this strategy is that it keeps the primary residence and rental properties separate. Should the landlord experience some financial problems in the future, only his rental properties would be at risk.
There Is a Third Option
Before closing this post, we should mention that there is yet a third option. Rather than getting a standard home loan or remortgaging rental properties, some property owners are going to the extent of creating limited companies and then using those companies to buy their entire portfolio of rental properties. As company directors, the property owners still receive regular income from buy-to-let. But because a limited company now owns the properties, interest paid on mortgages can still be written off as a business expense.
If nothing else is learned here, all of this should make it abundantly clear that our system in the UK is rather complex. There are rules that govern every detail of mortgaging, whether you borrow on a standard home loan, a buy-to-let mortgage, or a refinancing product. The one thing every potential landlord should know is the need to understand how all of this works before investing.
Can a simple home loan save buy-to-let? That remains to be seen. We're going to find out shortly, as more landlords start looking for ways to reduce their expenses ahead of losing the mortgage interest tax deduction come April.
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