Pay more interest now, save more tax later…

Simon Whittaker takes a look at buy to let stepped mortgage rates and explains why you might be better off taking out a step-down rate instead of a step-up from a tax perspective.

 

Paragon has recently launched two ranges of five year stepped fixed rate buy to let mortgages that are identical except for the fact that the one product range has step-up rates whilst the other has corresponding step-down rates as shown below:

Interest rates

Product “A”

Product “B”

Year 1

2.75%

4.75%

Year 2

3.25%

4.25%

Year 3

3.75%

3.75%

Year 4

4.25%

3.25%

Year 5

4.75%

2.75%


Why would anybody want to use the “B” product when it just brings forward the dates when interest is paid?

Surely it must be preferable for an investor to use product “A”? And even if they had no other use for the money it could at least sit in the bank providing a cash cushion and earning a small amount of interest.

Ignoring for the moment the possibility of negative interest rates on deposits, there is one possible significant benefit to the payment of more interest now, and less later.

Landlords should be fully aware by now of the changes in tax relief for interest costs that are due to come in over the next four years. If an (individual) landlord takes out product “B” then he will receive full relief or 75% of full relief from 6 April 2017 whilst paying 4.75% interest – and by the time that the restriction on interest rates comes into full force in April 2020 he will be looking forward to paying the lower rates applicable in Years 4 and 5 of the mortgage.

So on a mortgage for £100,000 taken out on 6 October 2016 for a 40% tax payer the tax relief that they will receive are as shown below:

 

Product “A”

Product “B”

Flat rate 3.75% product

 

Interest

Tax relief

Interest

Tax relief

Interest

Tax relief

Year 1

£2,750

£1,031

£4,750

£1,781

£3,750

£1,406

Year 2

£3,250

£1,056

£4,250

£1,381

£3,750

£1,219

Year 3

£3,750

£1,031

£3,750

£1,031

£3,750

£1,031

Year 4

£4,250

£957

£3,250

£732

£3,750

£844

Year 5

£4,750

£950

£2,750

£550

£3,750

£750

Total

£18,750

£5,025

£18,750

£5,475

£3,750

£5,250

NB – figures reflect that half of each “Year” for the product falls into a later tax year.

The savings are not massive, but in the words of a well-known supermarket, “every little helps”!

For more information contact me on 01732 471622.

 

*Stepped Fixed at 2.75% for 1 years (to 31/10/2017), then 3.25% for 1 years (to 31/10/2018), then 3.75% for 1 years (to 31/10/2019), then 4.25% for 1 year (to 31/10/2020), then 4.75% for 1 years (to 31/10/2021) reverting to 5.35% (LIBOR + 4.75%). For purchases and remortgages. Early Repayment Charge: 5% of the amount being repaid until 31/10/2018, then 4% until 31/10/2020, then 3% until 31/10/2021 from drawdown. Overall Cost for Comparison: 5.2% APR. Loan to Value: 75% loan to value up to £500,000 loan amount. 70% loan to value up to £1,000,000 loan amount. 65% loan to value up to £2,000,000 loan amount. Lender Arrangement Fee: 2% added to loan. Broker Fee: A broker fee of £497 will apply (other fee options available). Repayment Options: Interest only or repayment. Rent to Interest Cover: 125% of the cost calculated at a rate of 5.00%. Minimum Income Required: £25,000 per annum.

 

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