9:21 AM, 14th November 2018, About 4 years ago 8
I have not seen this discussed before, but was wondering why there aren’t more BTL lending products where there is an much larger arrangement fee and much reduced interest rate as the fee is tax deductible, but the interest is not and would help get around S24 for those who are unincorporated.
Basically if you stump up more in fees upfront, you save S24 tax.
e.g. let’s say on a 100k 5 year fix (most optimal BTL mortgage in my opinion), I reckon there is a 37% S24 tax reduction (Note I am talking about the additional S24 tax to be fully imposed by 2021 and exclude as the other usual other taxes) if an arrangement fee went from, say, 2k to 10k and the interest rate went down from 2.4% to 1.4%. The 10k would need to be paid upfront and not added to the loan of course otherwise the fee is no longer deductible.
Here’s the calculation:
1. Normal situation post 2021: Assume higher rate tax payer, 100k mortgage fixed for 5 years at 2.4% with 2k arrangement fee. Annual interest is 4.2k. Over 5 years, the total additional S24 tax would be 8.4k. The Fee to loan ratio is 0.67%
2. New BTL high charge product: Same mortgage, but lender ups the arrangement fee to 10K and reduces the interest rate to 1.49% so same overall mortgage cost over 5 years but the extra 8K arrangement fee is deductible. So annual interest drops to 2.6k and the 5 yr. S24 tax drops to 5.2k saving 3.2k (approx. 38% saving) but the fee to loan ratio rises to 10%.
3. Obviously, the calculation can be taken further but hits a limit to what you can afford upfront e.g. a 20K upfront arrangement fee would now result in an 85% S24 tax saving but if you want to borrow 100k, you are unlikely to be able to afford the 20k upfront fee – a fee to loan ratio of 20%.
The numbers start going tougher with a bigger (say 300k) mortgage as the fees tend to stay the same but there are still opportunities if you can play with the fee to loan ratios. A fee of 20k (6.6% fee to loan) will save you 28% S24 tax. To get a 60% saving in S24 tax, you need a fee of 40k.
So why can’t more lenders do this – I think it would be a popular option plus lenders should like the ideal of getting more funds upfront.