Landlord TAX Relief - Repayment Mortgage

soapstar88

Hello Everyone,
Firstly I apologise if this has been covered before, although I have struggled to find a straight answer (and up to date). Without rambling on too much I will present the facts:

• We have consent to let our flat as we have built our own house, given the current situation in the local market properties are not selling very well, although renting seems to be very competitive with similar properties in the block renting in 2-3 weeks.
• Our mortgage on the flat is re-payment at a variable interest rate
• Mortgage outstanding is approximately 130k
• Rental income potential £675/month
• Approximate property value £180,000

Given the above information I would like to ask the question - does this seem viable? We are not looking to make a profit, a small loss is even workable, our main objective is to try keep the flat long term to pay off the capital or wait until the property prices increase again. I hate to say it but we paid approximately 200k for this property right before the market crashed in 2015, at least I am being honest!

Regarding TAX reliefs for landlords I am trying to get my head around this, particularly when it comes to interest relief on the mortgage. Given we have a re-payment mortgage, of which part of it is interest can we take this interest off as an allowable expense? I understand how it works for an interest only mortgage but a re-payment mortgage is slightly more confusing.

Appreciate your help!

IAMIAM

From my initial understanding, mortgage interest was excluded and expenses for the property rental for tax purposes, however - I believe it may now not be allowed to be excluded. The part about when selling, ultimately, I think you are tax free if it actually sells for what you paid for it (£200k), its the growth part only that then gets taxed.

[Deleted User]

soapstar88 said:

Hello Everyone,
Firstly I apologise if this has been covered before, although I have struggled to find a straight answer (and up to date). Without rambling on too much I will present the facts:

• We have consent to let our flat as we have built our own house, given the current situation in the local market properties are not selling very well, although renting seems to be very competitive with similar properties in the block renting in 2-3 weeks.
• Our mortgage on the flat is re-payment at a variable interest rate
• Mortgage outstanding is approximately 130k
• Rental income potential £675/month
• Approximate property value £180,000

Given the above information I would like to ask the question - does this seem viable? We are not looking to make a profit, a small loss is even workable, our main objective is to try keep the flat long term to pay off the capital or wait until the property prices increase again. I hate to say it but we paid approximately 200k for this property right before the market crashed in 2015, at least I am being honest!

Regarding TAX reliefs for landlords I am trying to get my head around this, particularly when it comes to interest relief on the mortgage. Given we have a re-payment mortgage, of which part of it is interest can we take this interest off as an allowable expense? I understand how it works for an interest only mortgage but a re-payment mortgage is slightly more confusing.

Appreciate your help!

Aberdeen? 

Your mortgage statements will tell you how much interest you paid on your mortgage. Mortgage interest is an allowable business expense regardless of what type of mortgage you have however you will only be given as a basic tax rate reduction. 

https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords

There are other expense you can claim as well. 

https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

AdrianC

soapstar88 said:

We are not looking to make a profit, a small loss is even workable, our main objective is to try keep the flat long term to pay off the capital or wait until the property prices increase again.

"We're going to start a loss-making business, in the hope that the accumulated operating losses will ultimately be cheaper than crystallising the capital loss now"
Good luck.

What interest rate are you paying currently on your SVR with CTL?
How long is the remaining term?
Tell us that, we can see roughly what interest you'll be paying - your mortgage statements will give the actual figures at the end of the year.

Will you be self-managing, or paying an agent?
Does anything need spending on the flat to make it lettable?
What are the annual service charges and ground rent?

soapstar88

Lover_of_Lycra said:

soapstar88 said:

Hello Everyone,
Firstly I apologise if this has been covered before, although I have struggled to find a straight answer (and up to date). Without rambling on too much I will present the facts:

• We have consent to let our flat as we have built our own house, given the current situation in the local market properties are not selling very well, although renting seems to be very competitive with similar properties in the block renting in 2-3 weeks.
• Our mortgage on the flat is re-payment at a variable interest rate
• Mortgage outstanding is approximately 130k
• Rental income potential £675/month
• Approximate property value £180,000

Given the above information I would like to ask the question - does this seem viable? We are not looking to make a profit, a small loss is even workable, our main objective is to try keep the flat long term to pay off the capital or wait until the property prices increase again. I hate to say it but we paid approximately 200k for this property right before the market crashed in 2015, at least I am being honest!

Regarding TAX reliefs for landlords I am trying to get my head around this, particularly when it comes to interest relief on the mortgage. Given we have a re-payment mortgage, of which part of it is interest can we take this interest off as an allowable expense? I understand how it works for an interest only mortgage but a re-payment mortgage is slightly more confusing.

Appreciate your help!

Aberdeen? 

Your mortgage statements will tell you how much interest you paid on your mortgage. Mortgage interest is an allowable business expense regardless of what type of mortgage you have however you will only be given as a basic tax rate reduction. 

https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords

There are other expense you can claim as well. 

https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

Ok so it would seem we can indeed use our interest from our capital repayment mortgage as a business expense. although how can this be worked out? I do have my annual mortgage statement at hand...AdrianC said:

soapstar88 said:

We are not looking to make a profit, a small loss is even workable, our main objective is to try keep the flat long term to pay off the capital or wait until the property prices increase again.

"We're going to start a loss-making business, in the hope that the accumulated operating losses will ultimately be cheaper than crystallising the capital loss now"
Good luck.

What interest rate are you paying currently on your SVR with CTL?
How long is the remaining term?
Tell us that, we can see roughly what interest you'll be paying - your mortgage statements will give the actual figures at the end of the year.

Will you be self-managing, or paying an agent?
Does anything need spending on the flat to make it lettable?
What are the annual service charges and ground rent?

Our interest rate is currently 3.59% with a 34 year term remaining. Like I said I do have our latest annual mortgage statemtn but it doesnt make much sense to me, am i right in saying that its the difference between the amount going IN and OUT for each month? With the 'IN' being our current monthly mortgage payment.

• We plan on self managing
• Flat is ready to go and adheres to all the landlord legislation
• Ground rent is approx. £50 a month

Thanks for your help guys

AdrianC

THIRTY four years remaining...?!? Wow.
OK, so £130k at 3.59% for 34 years...
https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator/

About £552/mo, and in a year you'll repay just under £2k, so about £385/mo interest.

Let's ignore the capital repayment for the moment.
£650 rent in per month.
£385 out in mortgage interest, £50 in ground rent = £435, leaving £215/mo. But what about the service charge?
Allowance for bad debts, damage, maintenance, voids? Let's say 15% of rent, £97.50/mo, leaving £117.50.
Basic rate tax payers? So £95 in your pocket each month. 0.6% return on your investment, 2.3% return on your equity.

But that £95 is offset against the £167/mo going to repay borrowed capital - so you're actually down by £72/mo.

steampowered

The other option would be to sell, and to put £50k into stocks & shares ISAs.

The stock markets have historically generated 7.5% per year on average so that's what you might expect to get from a fund diversified across the stock market, such as a Vanguard fund. 

If you have had the mortgage since 2015, make sure you are on a competitive rate - if not, remortgage. If you are now on the lender's standard variable rate you'll be massively overpaying.

soapstar88

AdrianC said:

THIRTY four years remaining...?!? Wow.
OK, so £130k at 3.59% for 34 years...
https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator/

About £552/mo, and in a year you'll repay just under £2k, so about £385/mo interest.

Let's ignore the capital repayment for the moment.
£650 rent in per month.
£385 out in mortgage interest, £50 in ground rent = £435, leaving £215/mo. But what about the service charge?
Allowance for bad debts, damage, maintenance, voids? Let's say 15% of rent, £97.50/mo, leaving £117.50.
Basic rate tax payers? So £95 in your pocket each month. 0.6% return on your investment, 2.3% return on your equity.

But that £95 is offset against the £167/mo going to repay borrowed capital - so you're actually down by £72/mo.

Thanks very much for taking the time to put this together, very interesting.
The only charge is our factor charge at £50 a month.
Yes we are both currently just under the basic rate - I assume there is no implications or advantages have a joint ownership with a spouse?

steampowered said:

The other option would be to sell, and to put £50k into stocks & shares ISAs.

The stock markets have historically generated 7.5% per year on average so that's what you might expect to get from a fund diversified across the stock market, such as a Vanguard fund. 

If you have had the mortgage since 2015, make sure you are on a competitive rate - if not, remortgage. If you are now on the lender's standard variable rate you'll be massively overpaying.

I would love to sell however it would mean loosing a massive amount of money given we paid approximately 200k and its now worth 180k (at best) - and they are not selling right now...renting however seems to be a different story.

The story behind the variable rate is we changed to this to reduce our monthly payments and to avoid any charges as we were planning to sell this property given we were building our own house to move into, however the market changed hence the idea to rent...

Thinking of it we should probably look into changing our mortgage back to a fixed rate now we are thinking of renting or do we wait to see how it pans out on a 'consent to let' and then switch to a buy to let mortgage? I am aware we may need to pay off some capital to be within the LTV % for buy to let mortgages.

AdrianC

soapstar88 said:
I would love to sell however it would mean loosing a massive amount of money given we paid approximately 200k and its now worth 180k (at best) - and they are not selling right now...

You've already lost that money. At the moment, it's only a paper loss, so you can fool yourself it doesn't exist.

theartfullodger

soapstar88 said:

............................We are not looking to make a profit, a small loss is even workable,...........................

??? Don't think this plan would be viewed positively by many but, hey, free country!

soapstar88

theartfullodger said:

soapstar88 said:

............................We are not looking to make a profit, a small loss is even workable,...........................

??? Don't think this plan would be viewed positively by many but, hey, free country!

OK so what would you recommend? The property wont sell, so how would you proceed? Just leave it and pay a mortgage on it until the market picks up again? We are only trying to cut our losses, I am not exactly planning on going to the Dragons Den with this proposal...