The Bank of England’s decision to raise the interest rate yesterday, from 0.5% to 0.75%, will increase the interest costs of more than three-and-a-half million residential mortgages as well as buy-to-let mortgages that have variable or tracker rates.
The Bank’s nine-member monetary policy committee voted unanimously for the increase, judging that the economy had bounced back from a soft patch earlier this year triggered by the cold weather and heavy snowfall.
But the decision to increase interest rates by 0.25% will have an adverse impact on buy-to-let property owners who are already reeling from cuts in the amount of interest relief allowable as a deduction against their rental income, according to Blick Rothenberg.
Paul Haywood-Schiefer, a manager at the accounting, tax and advisory firm, said: “For many people who were getting no return on their capital due to long term low interest rates and decided to invest in buy-to-let properties this will be another blow.
“They wanted to get better returns and for many it was also part of their retirement plans.
“The increase in the Bank of England base rate will have a knock on effect on mortgages for thousands of people.
“Those buy to let investors with mortgages may be some of the worse affected as not only do they have to deal with increased interest repayments, they will also be dealing with the fact that for the current tax year, they will only receive full interest relief on 50% of the cost of interest incurred, with the other 50% only receiving basic rate tax relief.”
The amount liable to full interest relief will reduce by a further 25% from April 2019 and from April 2020; interest incurred will only attract basic rate tax relief.
Haywood-Schiefer added: “At the moment this is all new and as buy-to-let property owners pay tax on the income they earn from this through their tax returns, many of them will not have yet calculated the position that the reduced interest relief will have had on their profits from 2017/18.”
“Once they see the reduced profits, they could put up rents to ensure their yields, which will be bad news for those renting and trying to save for properties of their own.”