Refinancing buy to let properties – Section 24 issues

Before we go into the details please allow me to point out that Simon Misiewicz nor Optimise Accountants are financial advisors or mortgage brokers. The information provided below is for educational purposes from a tax perspective. The information contained in this article does not constitute as financial advice.

1. Can you remortgage on a buy to let?

It is entirely possible that a property may be refinanced. An extra amount of equity will have been built up if the property increased in value. A property may have increased in value for a number of reasons:

– Property values in the area have increased over time

– The property owner added value to the property (more bedrooms, extensions, additional garages etc)

– The property may have originally been purchased below market value

Data from UK Finance shows that landlords remortgaged 14,700 properties in July.

A buy to let landlord may be able to pull more money out of their existing mortgage provided that there is equity in the property and the mortgage holder has a good credit rating.

The stress test criteria when refinancing your buy to let mortgages

The last thing to consider is the % of mortgage interest repayment rate. Some lenders wish to see an interest cover (stress testing) of 145%. This means that your net rent needs to be 1.45 times more than the mortgage interest charges. Lenders may not lend to you if the net rent does not meet or exceed their % criteria.

£10,000 net rent

£6,000 mortgage interest costs

The above shows that there is 1.67 times cover to meet the stress test condition of 145%. A buy to let landlord wanted to increase the mortgage and the interest charges increase as shown below:

£10,000 net rent

£7,500 interest rate

The stress test criteria is no longer met. This is because the cover is reduced from 1.67 to 1.33 (£10,000 divided by £7,500). It is unlikely that the lender would approve the remortgage application.

2.  Do I need a deposit for a remortgage?

You will need to find a deposit on any property that you pay. The amount of deposit that you require will be from 10% to 50% (or even more) based on the below

– Your credit report and credit rating, which you can investigate using Experian or Equifax

– The condition of the property. The greater the disrepair the greater reassurances bank will require

– The risk profile of the investment. The greater risk to the banks will mean more deposit

– How you are going to buy the property. If the property is in your name or in a company with other Joint Venture partners. The amount of deposit needed may be less if the buy to let property is purchased in your own name.

– The age of the mortgage holder. The greater the age the more equity the banks will want to see.

Refinancing a buy to let mortgage to release cash for a deposit on a property investment 

Let us look at an example. John has identified a property in Birmingham. It is a four-bedroom house and is near the university. The property will be rented out to students. There is a high demand so renting the property that is refurbished to a high standard should not be a problem.

£200,000 house price

£50,000 deposit being 25% of the property value

The £50,000 can come out of John’s savings account. John could refinance an existing buy to let property that is just down the road in Birmingham, which is also let out to students. He purchased the property 8 years ago when the house price was £140,000. John knows that the property is in even better condition than the one he is looking to buy. He speaks with his mortgage broker and they agree to re-finance the existing property

£140,000 original house purchase

£200,000 latest valuation on the property

£60,000 increased the value of the property.

The £60,000 allows him to take out 75% as a re-mortgage. John decides to proceed with this re-mortgage. John is now able to use the £45,000 for the deposit on the new house.

£50,000 deposit required

£45,000 released as a remortgage in the existing buy to let property

£5,000 more required for John to complete the purchase

John now only needs to pull out £5,000 from his savings account to buy the new property because he refinanced the existing Birmingham buy to let property.

The mortgage interest cost associated with the refinancing is allowed to be offset against his property income as it is used for investment/business purposes. 

3. What are the implications of refinancing a buy to let property because of Section 24 mortgage interest relief cap?

Landlords from 2020/21 will not be able to offset the mortgage interest costs against their property income. From 6th April 2020, buy to let property investors will only receive a tax reducer of 20% of the mortgage interest costs. This means that high rate taxpayers will lose 20% tax relief on mortgage interest costs. Additional rate taxpayers will lose 25% tax relief on the mortgage interest costs.

You may not be able to offset the full amount of mortgage interest costs if you refinance a property and a high rate / additional rate taxpayer.

From the above example, we could see that John already has one property in Birmingham and looking to buy another. The first property had the following characteristics

£140,000 property value

£105,000 mortgage

The mortgage had an interest rate of 2%. This means that the mortgage interest costs per year were £2,100. In 2016/17 John’s tax return looked like this from the one property in Birmingham.

£15,000 income

£2,100 mortgage interest costs

£5,000 other costs

£7,900 profit

As a high rate taxpayer, he knew that 40% of the profits would be paid to HMRC. The amount of tax that John had to pay on his Birmingham property was £3,160. This leaves John with £4,740

6th April 2020 mortgage interest relief cap impact in John’s property

If we roll forward a few years we will see that the mortgage interest costs will not be allowed to be offset against his property income.

£15,000 income

£5,000 other costs

£10,000 profit

£4,000 tax

(£420) tax reducer at 20% of the mortgage interest costs of £2,100

£3,580 net tax to pay

We can see that John now has £420 more tax to pay.

If John were to refinance the original property and increase the buy to let mortgage by £50,000 the following would apply

£1,500 additional interest because of the remortgage.

£300 tax relief

£300 lost tax relief because of the tax changes

In this instance, John is paying more tax as a result of the original mortgage. He is also paying more interest on the remortgage without the benefit of the full tax reliefs.

To read more property tax saving ideas visit Optimise Accountants blog page

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