The arrival of the 2020 financial year will spell the end of what remains of mortgage interest tax relief. Although this won’t be exactly news to buy-to-let landlords, it has been in the process of disappearing since April 2017, it may be a useful prompt to buy-to-let landlords to review their finances and make sure they have the right financial products for their situation.
Mortgages
Traditionally, repayment mortgages have been the more expensive option for landlords, but hey offered the benefit of allowing a landlord to build up real equity in their portfolio and, ultimately, to end up owning the property in its entirety. Interest-only mortgages, by contrast, were more affordable and allowed landlords to maximize yield, thus increasing their income for the duration of the mortgage. The abolition of tax relief on mortgage interest may, however, have changed this subtly. The reason for this is that as a repayment mortgage progresses, the borrower pays less and less in interest and more and more of their repayments go towards the capital. With an interest-only mortgage, however, the capital is never repaid (or at least not until the end of the mortgage), which means that the borrower continues to pay interest at the same rate throughout the course of the mortgage. In the old days, this was largely irrelevant, as mortgage interest could be set against tax, but now that the old system of tax relief has now been replaced by a system of flat-rate tax credit, landlords could find that the difference is meaningful even without the benefit of building up equity. As always, people need to do their own sums, but it is definitely worth checking.
Insurance for your property
In addition to taking out standard insurance on the fabric of the building, landlords may want to consider whether or not they want to cover the contents. Even if the property is let unfurnished, it will presumably have at least a kitchen and a bathroom and these can be expensive to replace if your tenants leave them damaged. They can also cause expensive damage to your tenants’ property if they malfunction, for example, if a washing machine springs a leak, so you might also want to consider protecting yourself against that. Finally, although this is not, technically, protecting your property, you might want to take out insurance against loss of income from it, be it through non-payment or through voids.
Insurance for yourself
Harsh as this may sound, protecting your property starts with good tenant selection. There is simply no two ways about this. There is, however, a potential complication in that landlords need to select tenants in a way which complies with the law, in particular the Equality Act 2010. This may seem self-evident, but it can be surprisingly easy to act in a way which may be considered discriminatory, or at least perceived as discriminatory by a potential tenant, especially if a landlord is nervous about falling foul of the “Right-to-Rent” rules. Lettings agents may be useful here, but if landlords choose not to use them (or even if they do), it may be advisable to take out some form of legal expense insurance for landlords. This may also be useful if landlords have to deal with problem tenants. Last, but by no means least, landlords may wish to think about insuring their own health, especially if they are active in the management of their portfolio (as opposed to leaving it to lettings agents).
A final point
If you are using a financial product for a buy-to-let property, then you must take out products which are intended for that market, not products for the residential market.
Your property may be repossessed if you do not keep up repayments on your mortgage.
The FCA does not regulate some forms of buy to let mortgages.
The FCA does not regulate letting agents and we act as introducers for them.