BTL success spoils landlords for choice

Buy-to-let is one investment where the economic conditions make decent returns feasible. With interest rates and first-time buyers at historical lows and rents rising in many parts of the country, now could be a good time to invest.

But should landlords, if they haven’t done so already, be thinking about ploughing back some of this income into their investment portfolio? Perhaps it’s time to consider acting in the same way that residential prop­er­ty owners are being urged to do, which is to pay down some debt instead.

Figures by Hometrack suggest homeowners could be mortgage free within three years if they make overpayments while interest rates remain

low. Property investors could surely achieve the same. By making over­payments on their BTL mortgages every month, they could soon own their assets outright.

It is more than three years since the Bank of England cut the Bank base rate to 0.5 per cent in March 2009, giving those who are able to make monthly overpayments on their mortgages the time to make quite a dent in their debts. With interest rates widely expected by economists to remain low for several years to come, there is an opportunity for those who have not already begun reducing their capital to do so.

However, is it the best approach for landlords? If they switch to a repayment vehicle on a BTL property, there are no additional tax benefits as they can only offset the interest part of the payment, not the capital repayment element. The rents they earn are treated as taxable investment income and so they will be taxed on these minus what they pay out in various costs. As such, any repairs or maintenance – such as window cleaning or sorting out the central heating – can also be offset.

Investors may want to use the income to carry out improvements to a property or build up a deposit to extend their property portfolio. These are all worthwhile options for landlords. Ultimately, an investor’s approach will depend on what they are trying to achieve. If landlords are successful in building their portfolio, they will have the choice of maximising monthly returns or reducing their debt through overpayments.

There is not a better or worse approach as it will absolutely depend on the financial objectives of landlords. It is just worth remembering that strong yields can be used in a variety of ways.

Article courtesy of Mortgage Strategy

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