Dear Richard Brown,
New Beginnings Article YPN
I have just read with interest your above article in June's issue of YPN.
I have a portfolio of 6 'vanilla' BTL mainly 2-bed flats. 5 of them are mortgage free and I took equity out of my main home and one of the BTL properties to fund two of the more recent purchases.
I'm a higher rate tax payer but will be scaling down my main job soon thus earning significantly less which will hopefully reduce my overall tax liability.
My current borrowing total is £235k worth of interest only mortgages on a BTL portfolio worth approximately £1.5m and I'm looking to significantly reduce this debt over the next couple of years. I want to keep the number of BTLs I have now and just pay off as much debt as possible. I don't wish to expand the portfolio and take on any more borrowing.
I read with interest your Danger List and came to the conclusion that I am in the 'Defend' position you talk about. Would you agree with this?
I like everyone am concerned with the recent government changes but hopefully, I'm in a fairly strong position but want to get more opinions from experts like yourself. I note you ask readers to share thoughts and ideas.
Many thanks in advance and I look forward to hearing from you.
Best regards
Brian (not his real name)
Extract from the YPN magazine article:
DEFEND
The first step is to look at our current situation and try to protect or defend it. Aim to keep mortgage lending down by reducing the LTV at the outset or by overpayments. Look at switching to longer-term or low-rate fixed deals. Increase rent levels more steadily over the next few years than perhaps we might have done otherwise.
Consider placing new BTLs into company ownership. Noting that this may not be suitable for everyone and so professional advice is recommended.
VARY
The hardest hit segment of BTL will be those that cannot service their mortgages and tax bills through cash flow following the changes. This will be where low yields and rental coverage of mortgage repayments leave a small margin of pre-tax profit today. Instead, seek higher yielding single lets, such as in in the outer regions of the UK.
Alternatively, multi-lets or houses of multiple occupation (HMO) in any area with the right mix of rental demand and supply permissions.
ALTERNATIVES
Alternatives that we could consider include short-term lets, such as holiday rentals and serviced accommodation. Equally, moving away from pure rental strategies could bear fruit, such as property trading, conversions and development projects. Many of these strategies currently have more favourable tax treatment than BTL.
More creative strategies can come into play, such as lease options and rent-to-rent. However, more creative can also mean more complex, more risk and more sharks at times too!
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Hello Brian
Thank you very much for reading my column in YPN magazine; I appreciate you both reading and also connecting with me about it.
In summary, yes you are technically on the Danger List, purely as a result of being a higher rate taxpayer and having some BTL mortgage debt in place.
However, judging by the fact that you have a very low LTV at less than 16%, that you plan to stop acquiring new properties and pay down this debt, it seems to me that you are in reasonably good shape. You should not be too badly affected by the forthcoming changes from an interest deduction point of view by adopting this approach. Ergo, yes, I would agree that you are in 'Defend' mode.
If you have enough property and income, then paying down the debt before the Clause 24 changes take full effect will be a good for you approach for you I would think. If you were to add to the portfolio later on using lending, then based on current planned legislation, investing through a company structure would avoid the Clause 24 interest deduction pain.
Best
Richard