I am by no means an expert in buy to let. I bought a 2 bed garden flat in a northern suburb of London for £245k a couple of years ago. it is now worth circa £300k. I put down a £100k deposit and a mortgage for the balance. With an annual rental of £15600 this equates to a gross return on the purchase price of 6.37%. However the mortgage interest is £5172 pa (fixed for five years) giving me a gross return on my own capital employed of £10428 or 10.4%.

In pure investment returns it makes good sense to retain the mortgage whilst ever the mortgage interest rate remains appreciably below the percentage return in rental income.

"Please bear in mind the imminent changes to tax relief on buy to let mortgages. ( there won't be any)"

Not quite so. I, too, was under the impression that, phased over the next 4 years, interest would no longer be able to be claimed as an expense against rental income, but in fact it seems that the relief will be limited to basic rate tax (20%). Still an impact, but less than I thought originally.

https://www.gov.uk/gover...or-individual-landlords

The other thing to be aware of is the Stamp Duty 'surcharge' of 3% on top of existing rates on any additional properties bought by existing property owners.

Actually, the first statement is correct; from the 2020/21 tax year onwards individual borrowers will no longer be able to claim relief on buy-to-let finance costs, including mortgage interest. In its place will be a rebate of 20% interest paid (or the proportion of the interest that is not subject to relief during the phase-in period; 25% in 2017/18, 50% in 2018/19 and 75% in 2019/20).

The confusion arises because the rebate amount is set at the basic level of tax, which is currently 20%; however, this is not equivalent to the retention of a basic rate relief.

This is an important distinction because it means that taxable income will increase. In cases where landlords who currently pay the basic rate of income tax are forced onto higher rates because their interest costs are no longer off-settable, they will in fact be taxed on a loss.

You can visit our website to read a breakdown of the effect that this policy may have in some cases: Will basic-rate landlords be forced into higher tax bands?

That is my point; some basic-rate taxpayers will become higher-rate taxpayers as a result of their taxable income increasing due to interest no longer being off-settable.

Let's take your example, but say that instead of one property the landlord has three identical properties financed with three identical mortgages. That means total rents of £60,000 and repayments of £30,000.

Rents less repayments is £30,000, which creates a tax liability of £6,000 (30,000 * 0.2)

When the new system is fully phased in, you will pay tax on the full £60,000; at the current bands, your liability will be (31,785 * 0.2) + (28,215 *0.4) = £17,643. Less a tax reduction of 20% of the finance costs not deducted (£6,000) = £11,643.

In this simple example, the tax payable has increased by 51.5%.

There are many factors that this does not consider, such as other expenses and income, personal allowance etc., but should serve to highlight the fact that replacing a tax relief with a basic rate reduction does not always create an identical liability.

It is my pleasure. I'm glad that I could help explain the potential implications of the new regime, though I should point out that my posts are for information only and are not a substitute for professional financial advice, which will take into account all of the factors involved in your own personal tax situation. (This goes for anyone reading!)