Buy to Let Offset Mortgage

Published / Last Updated on 05/06/2017

Help to Buy ExplainedBuy to Let Offset Mortgage

Many buy to let landlords will be aware of the changes to how much tax relief can be claimed on financing charges (mortgage and loans) for buy to let investment property that started in April 2017 and are being gradually phased in over the next 3 years:

Firstly, the amount of Income Tax relief some landlords can get on residential property finance costs will start to be restricted to the basic rate of tax from 6 April 2017.  This is being gradually phased in from April 2017 through to April 2020. 

Tax year

Percentage of finance

costs deductible

from rental income

Percentage of

basic rate

tax reduction

2017 to 2018 -

75%

25%

2018 to 2019 -

50%

50%

2019 to 2020 -

25%

75%

2020 to 2021 -

0%

100%

 

So last year (2016-2017), all of your finance costs could be offset against profits and if you are a higher rate or additional rate tax payer, tax relief was effectively given up to 40%/45%.  This has now changed meaning that in 2017-2018 75% of your finance costs can be offset against full tax liability and 25% of your finance costs will be restricted to 20% relief.  So for basic rate tax payers there is no change but for higher rate tax payers and above there is a significant change over the coming years.  By 2020 all finance expenses will be restricted to 20% relief.

In another article, we have covered the option of a Joint Borrower Sole Proprietor Buy to Let Mortgage, here we look at the Buy to Let Offset Mortgage

Buy to Let Offset Mortgage

Many landlords and mortgage lenders are looking for ways to protect from these mortgage expenses tax relief changes.

There are now a number of lenders that offer ‘buy to let offset mortgages’.

What is an offset mortgage?  Originally from Australia, these types of mortgage work by you having a normal mortgage with interest charged and then having a linked savings account.  You receive zero interest on your savings in the account, but the likewise no interest is charged on your mortgage account for the loan amount equivalent to the savings.  In effect, you pay reduced interest.  These mortgages have proved extremely popular over the last few years given that having cash savings in other accounts such as Cash ISAs earning low interest, it is potentially better as you have your cash savings reserve in the mortgage offset account to ‘dip into’ yet, whilst funds are still in there you are saving on reduced mortgage interest payments.

This is potentially good for buy to let investors given the changes to finance expenses relief and a number of buy to let lenders now offer Buy to let offset mortgages.  If you would like help or advice on buy to let mortgages please contact us.


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