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  • Tax

    S24: Interest-only mortgages less attractive?



    I would be interested to hear the tribes view on the following question:

    Does Section 24 make interest-only mortgages less attractive, compared to repayment for non-incorporated landlords?

    The reason I ask is that, in the many discussions we have on PT about interest-only vs. repayment mortgages, one of the main reasons cited for opting for IO is that it is more "tax efficient".

    With the introduction of Section 24, that could potentially no longer be the case.

    For 40% tax bracket landlords, capital repayment mortgages may start to look more attractive, certainly on full implementation of S24 in 2020.

    Furthermore, by making capital repayments, you are reducing the debt, and debt repayment is one mechanism of reducing the impact of Section 24.

    For lower-rate tax payers, interest-only could still be more tax efficient, but it would be worth crunching the numbers with a professional tax advisor. 

    The advent of the PRA is establishing lower loan to values, and this is obviously less risky than being highly leveraged.  

    Will we see many landlords taking S24 into account and opting for capital repayment mortgages over interest only going forwards?

    Have the mortgage brokers in the tribe seen any evidence of landlords increasingly opting for capital repayment mortgages?

    One thing is certain - the days of the highly geared sole trader landlord on interest only mortgages scaling up quickly via equity release are well and truly over!

    Bang goes leverage?!

    SEE ALSO  -          Interest-only mortgages - How do they work?

    UP NEXT -              Interest only vs. capital repayment BTL mortgage
     
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    Does Section 24 make interest-only mortgages less attractive, compared to repayment for non-incorporated landlords?

    No, I don't think it does.

    S24 makes the absolute level of leverage that a portfolio can run profitably with lower

    But it doesn't change the cashflow advantage that IO loans have over repayment loans

    What might make IO mortgages less attractive is if they become more expensive:  Basel III / BCBS risk weight changes could do that in future, especially for high LTV loans

    Moreover, it shouldn't be a total surprise if IO lending is banned for BTL to the same extent that it has been for OO

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    Excellent pause for thought and so glad that we have 4 years to watch this slowly embed in to our lives!

    To answer "Have the mortgage brokers in the tribe seen any evidence of landlords increasingly opting for capital repayment mortgages?" ..... no, not one.

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    S24 doesn't make interest only unattractive; in fact it makes no difference at all if the property portfolio is structured as a business.  When done properly, running a professional property business means that S24 won't affect you at all, and you'll end up wealthier in the process.

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    I must say on all my Company Mortgages I have taken Capital and repayment

    And the Last Mortgages I have done before S24 were also Repayment

    I don't think there is a wrong or  right way for this it what suits you best and your own personal situation

    I Like C&R for a number of reasons I like to see my debt re payed   and I always link in behind the loan a Life Insurance Policy which would repay the Loan when I pass

    The Life cover can be written in trust so its very tax efficient in regard to IHT and succession planning

    But If you are young starting out and building a Business I can see the attraction of IO

    The issue we all have is what will the govt bring to our door ????

    IO could go and we could have another round of S24B

    I think we can be certain the banks and the Govt don't want high leverage

    So I would expect changes in the future.

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    Learn Change and Adapt ?????


    It is possible to have an IO and capital repayment mortgage at the same time!!

    OK it isn't exactly that but the effects can be the same

    It is indeed the offset BTL mortgage

    Now bearing in mind you don't want to pay churn fees every 5 years or so, a long-term offset mortgage makes eminent sense.

    You can even capital raise on your resi and deposit the funds in the offset mortgage savings account thereby reducing your S24 liabilities!

    You can access such funds whenever you like, so it is an excellent place to leave contingency funds etc.

    I strongly recommend that S24 LL consider the offset mortgage product as a small way to reduce some of their S24 liabilities

    Hinckley and Rugby and Family BS are doing some excellent deals currently.

    For S24 LL the offset mortgage can be a small way to reduce those nasty S24 liabilities a bit.

    Plus the interest deals are stonking currently

    You can have them long term providing you don't mind being a certain percentage ABBR on their low SVR.

    The offset BTL mortgage is a little way to beat some of the S24 damage if you have savings or income you can deposit in the offset savings account.

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    I can see the logic in reducing debt, but it is the cash-flow implications.  So initially you'd be making higher mortgage payments at the same time as finding the extra tax to pay.

    There is also the issue of committing to a repayment deal with higher payments, and then having a bad run of voids.

    I think the best way to execute this strategy is to keep on interest only, and make as many ad hoc voluntary overpayments as you can, thus giving you options during a bad patch.

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    Nope completely WRONG!

    The offset mortgage enables the LL to construct his own repayment strategy

    The more resources you can pour into an offset account the less S24 tax you will pay as you are reducing your S24 mortgage debt interest INCOME!

    The IR are lower on SVR than other lenders

    If by reducing S24 interest debt one can prevent loss of Child Tax credits etc it makes eminent sense.

    The beauty of an offset mortgage is you control the repayment facility.

    It is the best place to deposit all assets into the savings account.

    You can effectively overpay by depositing more in the offset savings account.

    You never lose ready access to those resources which you will do if you overpay a BTL mortgage in the conventional way.

    This is because you would need to go through a remortgage process to pull out funds you may have used to overpay that mortgage.

    This isn't easy now with the PRA regulations etc.

    It makes no sense to have a repayment mortgage when you can create your own with an offset one.

    You have to make the same payment every month which is more than the IO payment

    Whereas with the offset mortgage you only have to pay the IO payment and not bother about paying a capital payment amount into the offset savings account.

    Especially useful if you have a rough month, like a new boiler etc!

    For those LL trapped in S24 the offset mortgage has many advantages over the conventional IO BTL mortgage, it can save a LL from a payment default.

    It used to be that offset mortgages were considerably more expensive

    Well in the future and current low interest rate climate there is no danger of IR increases

    The UK is technically bankrupt

    Increasing BoE rates would kill the economy!

    They aren't going anywhere apart from down for decades.

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    Have the mortgage brokers in the tribe seen any evidence of landlords increasingly opting for capital repayment mortgages?

    We get a Landlord asking for a repayment mortgage - once in a blue moon. Since the Section 24 (Tenant Tax) changes we have seen absolutely no difference.

    Interest-only mortgages less attractive?

    Well no. On day one you are paying same Interest on an Interest Only & Repayment. 

    It is only over a certain period - that a the capital is repaid that the interest is reduced. (on some mortgages that is more true than others).

    Except! you can pay down the capital Interest Only - as many lenders give an Overpayment Allowance.

    In addition most Landlords get 2 Year Fixed Mortgages (I prefer a 5). Every two years the landlord has the option to remortgage (for a better rate away from SVR) and pay-down the capital at the same time - without ERC penalty.

    So to over simplify the argument - Repayment Mortgages is a disadvantage as it ties up your cash flow whilst often the same can be achieved with interest only mortgage, every time you refinance.

    As @Phil McKuhen says interest only gives better cash flow management. Say the government decides to Increase Taxation, Increase Regulation,  Void Periods and Interest Rates Rise. A landlord on Interest Only may have the cash flow to manage the change - plus the option to repay capital if needed. A landlord on Repayment may not have that cash flow and a contractual obligation to meet the payment in full.

    The Real Question is - To Leverage or Not to Leverage

    With Section 24 ("Tenant Tax"Wink Landlords will be taxed on that Finance Interest.

    The goal is for us all to therefore have unencumbered properties - the question is how to get there? The obvious choice is Repayment Mortgages or sale of units to pay down debt.

    Though many landlords will be looking instead - to retain interest only and use the cash flow. The old saying that Money makes Money, so can you put that money to work?

    (Can it give better returns than the Extra Interest + Extra Tax you would have paid over the same period or even fund paying down the debt.)

    Perhaps by renovating to increasing the value of existing units, buying properties to flip, construction or purchasing further investment properties.

    My point is echoing the saying "Don't Let the Tax Tail Wag the Investment Dog" meaning, don't make investment decisions solely based on tax considerations.

    Landlords I know will  put it another way - and simply fire up the Exell Spreadsheet.
    Whatever comes out with the best profitability for you is the business decision to consider. Use the money to make money, use as repayment or decrease risk by increasing available savings.

    (Paul mentioned Offset Mortgages - certainly a plus for landlords on interest only letting cash flow build up).

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    _________________________________________________________________________

    Looking for the Best BTL Mortgage? Call the Specialist Team at Bespoke Finance.
    The above post is not financial advice, its often me rambling - passing time on a coffee break.


    C24 has a markedly different affect for investors who are purchasing new properties than those who are "caught" in retroactive legislation.

    Your question will apply to people "caught" who are refinancing and people who are purchasing new.

    One of the longer term benefits of the current tough time landlords are having, is that it is making people sharpen their pencil regard to assessing the merit of a new deal. In the past days of "lie to bet" with self-certification, it was hard to find a deal that did not have merit. Many people own properties that are currently valued well below their current loan balances, as a result.

    The rationale for getting a mortgage on a property (apart from the obvious lack of funds to finance the purchase outright) is that by leveraging the deal, one increases the return on capital employed. This also enables many more properties to be purchased with the funds available.

    Whilst it is desirable to utilise cashflow to pay down your mortgage, cash is still king. The more you pay down your mortgage, the lower your return on capital employed. (if you consider that the repayments are the equivalent of employing more capital)

    I read of people who have a goal to be mortgage free on their portfolio. Everyone has different objectives for different reasons, but what if they had that choice from the outset? Would you simply use up a large pot of cash buying without a mortgage? The sensible route is to make your cash go further and leverage your investments. This must be balanced with a clear risk assessment of not being over-leveredged and exposed to risks.

    When considering the impact of C24 on new purchases, clearly the deal must work in the new environment. If you are to purchase in personal name and you are a higher rate taxpayer, then you need a better deal than pre C24 to make it work. But there are certain other factors that work in your favour.

    Consider if C24 were never introduced. What alternative challenges would you face? You may be paying upwards of 20% more than current market value for your property. That is a lot of cash! You may have another 2% of interest to pay on your mortgage (considering the Bank of England could have reacted to accelerated house price inflation by raising the base rate)

    I suggest it is a vitally important exercise for all that are affected by C24 to calculated their additional tax bill from now through to 2020 and make a plan.

    Alongside this, it is worth calculating what percentage increase in interest rates would have the same affect on your costs as C24 is having on your tax bill. That may help to put the matter into context.

    I would directly answer your question, that it does not change the principles that existed prior to C24

    1) leverage but with a safety margin

    2) use profits to slowly reduce your lending, but maintain strong cashflow

    3) make money when you buy

    4) ensure you have clean, multiple exits

    Of course you can always purchase in a limited company!

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    I dont think sec 24 changes whether it should be IO or CR

    Other measures  which may be introduced though  may make IO less attractive than it currently is

    If those measures don`t materialise  then I would go for an IO again as a CR is too restrictive

    I prefer the cash in my hand and I will overpay if I choose to not because my contract says I have to

    To me a CR is like a nanny state saying to you - I don`t trust you to manage your own business

    IO  also gives me flexibility and options to invest that cash at a higher return than the pay rate of the CR mortgage

    Pauls offset BTL mortgage is also a good option if the rate is right  and the small print for access to your funds is not too onerous

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    Jonathan Clarke. http://www.buytoletmk.com