The interest only time bomb…

We put up the Central Bank figures on interest only mortgages but thought some further thoughts on the matter might help.

That ‘interest only’ was used at origination isn’t news. Prior to the 2009 taxation changes on how mortgage interest is dealt with offsetting the interest meant that the capital payment effectively became your profit.

The shift away from this created cash-flow losses on money that was not truly received as profit and has helped create arrears. This unfair taxation treatment has avoided the exposure it warrants and it’s unfortunate that many commentators in the credit crisis space either lack micro-views or wantonly avoid it in order to look at things that are more emotive in order to create their arguments.

A moniker of ‘unfair’ is earned not granted, because the interest treatment is based upon the zoning of the property. If you had two Georgian buildings next to each other, one was a rental home the other an office, then the loans for the office are 100% offsetable, the one on the house …

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Tax liabilities on negative cashflows? The perils of renting out your home

There is an interesting situation that we are seeing much more of lately, where people in negative equity or negligible equity are deciding that because they cannot now move up the ladder (which was the point in their initial purchase – as a stepping stone to trading up), they will instead rent out their home and then rent a house in the area they actually want to live.

While this is a working solution to a person in negative equity seeking mobility it can result in a tax liability that many people are not aware of, this is how it occurs, the portion of mortgage payment that goes against the capital is actually taxable, and if it is paid to the bank it doesn’t mean you don’t have to pay tax on it.

The finance act in 2009 brought about a change whereby only 75% of mortgage interest can be offset against Case 5 rental income as an expense, and this further exacerbates the situation even for those who have interest only loans!

However, we’ll demonstrate the position a person …

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