Should you mortgage your home to slash buy-to-let debt?

Before risking your home to cut buy-to-let tax…. think

Buy-to-let tax changes, which start to take effect in April, are spooking some property investors. If you’re a higher rate taxpayer, the property tax changes to mortgage interest tax relief could cost you a chunk of your profit.

Some investors have questioned if property investment is worth it after the property tax changes. The answer is yes, by the way, especially if you use strategies to maximise buy-to-let yield and cut the tax on rental income

One investor recently asked if we would advise mortgaging his home to pay off a chunk of his buy-to-let mortgages. He’d been considering accessing the benefits of setting up a property company. But with the big investment news from the UK Budget 2017 being the reduction in tax-free dividend allowance, he wanted to explore other optios.

Ordinary residential mortgages are typically cheaper than buy-to-lnet mortgages. You could save as much as 2% in interest payments. And, if you’re using the money raised to pay off your buy-to-let mortgage, you could still get buy-to-let tax relief on the mortgage interest.

Here, you’ll learn about the factors you need to consider before mortgaging your home to pay off buy-to-let mortgages.

How much could you borrow?

Most property investors also own their home. If you own yours outright, the likelihood is that you’ve got a large pool of equity that you could access. However, how much you can borrow will depend on a number of considerations.

Your income will be used by the lender when calculating how much they are prepared to lend. When making this calculation, they won’t include rental income. Some investors, especially those who have held a property portfolio for some time, rely on their rental income. They either don’t have a job or work only part-time. If you’re in this boat, the lack of salary will inhibit your ability to mortgage your home.

Will the lender allow it?

The lender will ask what you plan to do with the money you’re borrowing against your home. Some won’t allow you to take an ordinary residential mortgage to pay off buy-to-let debt. Some will allow it, but won’t offer the reduction in interest charges you expect.

Will you get a buy-to-let tax credit on a residential mortgage?

If you use your mortgage to pay off your buy-to-let debt, you will still be able to claim the tax relief on your mortgage interest. It’s not the type of mortgage you have, but the use that is important. To claim tax relief, you’ll need to prove that the new mortgage was used to pay off buy-to-let debt.

Will paying off buy-to-let mortgages incur penalties?

Before going ahead, review the buy-to-let mortgage arrangements you have. It may be that you are locked in for a period of time, and early repayment will incur hefty charges. These could eat up all the money you hope to save by reducing your buy-to-let tax liability.

Are there better buy-to-let mortgage options available?

You may be able to reduce the mortgage rate or get a better deal, or cheaper fixed rate for longer to protect yourself from mortgage rate increases. The lending rules have been tightened over the last few months, so you’ll need to be aware of how much you can borrow now. It may be that you can’t borrow as much as you currently owe in buy-to-let mortgage debt. Read our article “The secret to getting great finance for your first investment property” for more information.

If you are considering a fixed rate deal, make sure you avoid the disastrous losses of a bad fixed rate deal.

Are you prepared to put your home at risk?

It is the big question. Currently, your buy-to-let mortgages are secured against your investment properties. All the risk is against them, and not your home. If something beyond your control crashes your finances, by mortgaging your home you could lose it.

You might be made redundant, fall ill, your business runs into adverse market conditions, or your rental income is affected by an economic downturn. You just don’t know what the future holds. Are you prepared to risk the roof over your head?

What should you do if you’re worried about buy-to-let tax changes?

Don’t hesitate to take control. The longer you leave a decision, the harder it will be to make and execute. There are several options and strategies that property investors are already beginning to put into place to reduce the effects of the buy-to-let tax changes.

The most important first step is to discuss your concerns and objectives with a property investment professional. Contact one of our team today on +44 207 923 6100, and we’ll get the ball rolling to ensure that your concerns are reduced, and your property investment portfolio stays on track to achieve your financial objectives.

Live with passion

Brett Alegre-Wood

Brett Alegre-Wood
March 29, 2017

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