The Bank of England has announced it is going to raise interest rates as early as May 2018 in order to tackle inflation levels of over 3.5%, but what does this mean for landlords, especially under the new Income Tax rules under Section 24?
In brief, every 0.5% rise in mortgage interest would mean, for a typical interest-only BTL mortgage of £137,500, extra mortgage costs of £687.50 per year in interest payments, or £57.30 per month
This is enough to threaten the narrow margins some private landlords are experiencing at the moment, but the situation is not quite as simple with the added effect of income tax increases under Section24, which this year see them being halfway to full implementation in the phased rollout, to be fully implemented after April 2020.
The effects of Section24 is that any interest payments on your mortgage will stop attracting Income Tax relief at the full rate, and only attract basic rate relief. At the moment, this is halfway through the implementation phase, and so it it half the mortgage payment that is affected (this increases to 75% in 2019/20 and 100% from April 2020)
For a landlord in the 40% income tax bracket, The result this year is an extra £10 for every £100 in mortgage interest payments in income tax liability.
Next year it’ll be £15
Thereafter it’ll be £20 for every £100 in interest payments.
So if the Bank of England raise interest rates by 0.5% in May 2018 (as is widely predicted), the monthly increase in costs (mortgage interest and income tax) for a private landlord with an interest only £137500 mortgage will be £63.02, or £756.25 per year.
Looking at the wider picture, and not just the figures around a one-off 0.5% increase in interest rate, the Bank Of England have suggested that the rise in May will be the first in a series of interest rate rises that, in the face of rising house prices and harder-to-find BTL finance, could seriously impact landlords’ ability to either buy new properties or service the ones they have. Especially in the new income tax regime, which has increased the overall costs to landlords in the Private Rental Sector by 5% per year, and when the rollout is complete, costs will be 20% higher than landlords are used to and budgeted for. 20% doesn’t sound like a lot until it is realised that a typical mortgage payment of £500 per month will cost private landlords a total of £600 to service.
There is a way to mitigate the increased costs associated with income tax through Section24 Click on the ‘About Section 24‘ and ‘About my 60/40 plan’ at the top of this page to find out more.
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