5 ways to cope with losing mortgage interest tax relief

For many landlords, the recent overhaul of the mortgage tax relief system has had a resoundingly negative impact. We know this first-hand as many of our customers have told us they’ve been affected – some of our customers have had to exit the sector entirely as being a landlord was no longer financially viable.

How does mortgage interest tax relief work?

Prior to April 2017, if you were a landlord with a mortgage on your property, any interest you paid towards the mortgage payments could be deducted from your rental income before you paid tax on it.

In 2017, the Government began phasing this out by 25 per cent each year, the aim being to end it completely by April 2020. 

Now, landlords receive a 20 per cent tax credit for all their property finance costs. So, how could this change impact your business? And what can you do about it?

Learn more about the taxes landlords need to pay and recent tax law changes in our full guide.

What were the old rules on mortgage tax relief? 

Prior to April 2020, buy to let landlords were able to claim tax relief on their mortgage interest payments at their marginal rate of tax. For many landlords, this was highly advantageous. 

Under the old system, a basic rate taxpayer would get 20 per cent tax relief, those at a higher rate would receive 40 per cent relief, and top-rate taxpayers could claim 45 per cent.

What are the new rules on mortgage tax relief? 

Now that the mortgage tax relief is 20 per cent for all landlords, for those higher rate taxpayers, the financial implications are significant – for some they may even be insurmountable. 

While basic rate taxpayer landlords have probably experienced no change in profit margins, those on higher incomes are likely to be losing money on mortgage interest payments – and the figures are not small.

According to estimated figures from the Nationwide Building Society, some landlords could now be losing more than 50 per cent of their profit. To illustrate this, they use the example of someone with a buy to let mortgage of £150,000 on a property worth £200,000. Under the old mortgage tax relief system, with a monthly rent of £800, this landlord would have a net profit of around £2,160 a year. Under the new system, their net profit plunges to £960 –  a decrease of more than 55 per cent.

In addition to this, if you’re a landlord with a long-term fixed rate (usually higher interest), and you factor in stamp duty, the profit margins could be so small, you may decide it’s not worth it. So is it all doom and gloom? 

Our full tax guide covers everything from mortgage tax relief and stamp duty to income tax. Read it here.

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Can anything be done to avoid the reduction in mortgage tax relief?

While many landlords have been hit hard by the loss of mortgage tax relief, the good news is there are things you can do to lessen –  or in some cases, nullify – the impact. Although the most glaringly obvious solution might seem to be increasing your rent, as well as this being unfair on tenants, you could quickly find yourself priced out of your market. 

If you have been impacted by the loss of mortgage tax relief, here are some solutions to consider:

Switch to shorter term fixed rate deals

This is a case of swings and roundabouts.

A shorter term fixed rate mortgage will certainly give you lower rates of interest compared to a long-term fixed rate.

However, while they seem financially attractive, shorter term fixed rate deals do carry more risk. 

Once your fixed rate expires, your rate will either convert to the Standard Variable Rate (SVR) or another available fixed rate.

Finding the right mortgage can make all the difference, so it’s a good idea to tap into the expertise of a specialist buy to let mortgage provider like Hamilton Fraser Total Landlord Mortgages, who will build a bespoke financial solution tailored to your specific needs as a landlord.

Become a limited company

The main advantage to using a limited company structure for your portfolio is that in doing so, all your rental profits will be taxed at the corporation rate of 20 per cent.

In addition to this, you’ll be able to offset your mortgage interest costs against your profits.

The only downside with this option is that you’ll have fewer mortgage options going forward; not all mortgage providers will lend to companies.

5 ways to cope with losing mortgage interest tax relief