One of the biggest life events to provoke a conversation about protection is when people buy a house and take out a mortgage.
This has been a constant for a long time in the UK.
Residential mortgages are a big catalyst for people taking out some form of protection cover.
Sometimes though, advisers find it a bit more difficult to position the idea of protection to landlords because the protection need is not quite as obvious.
People who purchase properties which they intend to rent out typically use buy-to-let interest only mortgages.
Often, their long term expectation is that property prices will increase and they will eventually cash in by selling them.
In the meantime, the rental income will fund the monthly mortgage payments and will also provide them with additional income.
Many landlords see the value of a property portfolio as a crucial part of their retirement planning.
However, in 2017, we saw the implementation of some new tax rules that meant over the next four years, the amount of mortgage interest which could be offset from rental profit reduces.
In this current tax year (2019/2020), landlords can offset 25 per cent of their mortgage interest from their rental profit.
From April 2020, this reduces to zero.
There is a tax credit relief available based on basic rate tax, but landlords will have to pay income tax on all of the rental income they receive meaning that many of them will pay more tax.
This new tax rule is going to change the landscape of the buy-to-let market.
How it normally works
For example, let’s say a landlord has five properties in their buy-to-let portfolio.
The properties are worth about £700,000 in total, but there are 5 lots of £100,000 interest-only mortgages, a total of £500,000.
Let’s say the interest rate on each buy-to-let mortgage is 3 per cent.
The total interest-only mortgage payments each month would be £1,249 or £14,988 each year.
Let’s say the income received on each property is £600 each month - in total this is £3,000 each month or £36,000 a year.
Clearly we can see that despite the large amount of mortgage debt and mortgage payments that need to be paid; the rental income will fund these mortgage payments and still yield a generous profit to the landlord.
A private landlord would typically complete a tax return each year and on it they would detail the income from their property portfolio and then detail all of their expenditures such as management fees and repairs, along with other expenses including the mortgage interest.
Income tax on the rental income profit is then charged at the normal rate of income tax.
But as you can guess, from April 2020, many private landlords with buy-to-let mortgages will simply pay more income tax on their rental income.
What if interest rates go up?
We know that we have been experiencing record-low interest rates for the past decade but inevitably, at some point, they are going to go up.