By anyone's standards, it’s a tough time to be a landlord. With Brexit just around the corner, a sluggish housing market, especially in the capital, and the possibility of another Bank of England base rate rise on the horizon, there's a lot of uncertainty to contend with. And to add to our woes, the government has just begun the next phase of the buy-to-let tax hike, which will see tax bills increase and profits shrink even further.
In a nutshell, the rate rise will mean that landlords will no longer be able to offset their mortgage interest payments against their profits before calculating tax. This means landlords will inevitably face higher tax bills, even while their income remains the same. And, now that it's almost two years since the buying frenzy that followed the buy-to-let stamp duty increase, many landlords are about to reach the end of their initial fixed-rate period. So, some renters could be about to face a double whammy of increased tax and higher mortgages rates.
With so much doom and gloom forecast, many landlords are even considering selling up and leaving the rental market altogether. But, even in the current climate, there are still ways to help shore up your assets and protect your income.
Here are some of my top tips for buy-to-let investors who are looking to protect their rental income, including tips on managing your costs to beat the tax rise and finding the best possible mortgage rates.
Beat the rate rise by remortgaging
One of the simplest ways to reduce the impact of the tax hike is to find the cheapest possible rate, so you'll have a smaller tax bill. And, despite a financially turbulent rental market, competitive deals are still out there: lenders like Virgin are currently offering rates as low as 1.75%. And it’s not just short-term mortgages, either. Skipton is currently offering five-year fixes for as low as 6.68%, which could be a better option for those looking for long-term stability.
Remortgaging is an especially effective solution for investors who only own one or two rental properties so,if you've got a smaller property portfolio, now is the time to shop around for a new deal.
Make use of pension allowances to reduce tax
While there’s no way to avoid paying the extra tax, there are a few ways to protect your income. Those earning over the higher rate tax threshold, which stands at £46,350 for 2018–19, could reduce their tax bill by finding voluntary ways to lower their taxable income.
Despite successive new taxation laws on a range of other assets, pension allowances remain unscathed, so they’re a viable option for those looking to reduce their taxable income. By making larger pension contributions, you can effectively reduce your overall tax bill. This way, the money will still be in your pocket — you'll just have to wait until you’re ready to use your pension in order to access it.
Consider a shorter fixed-rate period on a cheap deal
If you find a mortgage deal that offers a better rate than your current product, you could effectively offset the effects of the tax rise on your rental income. The cheapest rates are currently on two-year fixes so, if you can afford a large deposit, a short-term product could help you recoup some of your losses.
Of course, there's always an element of risk with any product with a short fixed-term, as you'll need to find another deal within just a couple of years, or risk staying on a higher rate. But, if you've got the cash for a bigger deposit and you’re willing to take the risk, it could pay off.
Reduce your mortgage amount with your savings
Those with some savings in the bank could also consider paying off a chunk of their buy-to-let mortgage in order to reduce the total mortgage amount. While this will use up a chunk of your savings, it's good way to lower your overall payments, meaning you'll minimise costs and maximise profits. If you're confident that the value of your rental property is going to rise, it's also likely to be a sound investment in the long run, even if you eventually need to sell up.
Find other ways to manage your costs
Increasing the profitability of your rental properties can help to offset the impact of the tax, and one way to do this is through a rent rise. Rents have been rising slowly but steadily ever since the tax was announced last year, as landlords begin to pass on the cost of the rise onto their tenants. While a drastic rental increase probably isn't such a good idea (you want to remain competitive, after all) a small increase could help to recoup some of your losses.
It's also a good idea to look at your costs across your portfolio and see if there are any ways you could reduce outgoings. For instance, finding a letting agent who offers more competitive fees, or switching to an online agent, could you save you a surprising amount cash.
With the future of the market looking uncertain, landlords who want to turn a profit will need to rebalance the books and start searching for the best mortgage rates. Remember, as with any new investment, it’s best to seek advice before making any decisions, so work with your financial advisor and consult a mortgage broker in order to work out which of these decisions is right for you.
Matt Stevens is a director at The Mortgage Genie, a brokerage that offers buy-to-let advice.