Is letting my house better than selling - (buying new house too)

Andy_ArT_Trigg · 23 April 2007 at 12:26PM

We put our house on the market after we saw a house we want. We sold it to the first viewer at full asking price £120,000 and had our offer of £172,000 accepted on the property we desire.

Almost two weeks later our buyer pulled out and we've only had 2 other viewers since. It's now been 10 days since the last viewer and interest seems to have wained.

The house we want has now had to be remarketed and of course we stand to lose it if we don't sell quickly.

I've started to look proactively at other options. What about borrowing the full amount to buy the house we want, but with an interest only mortgage and then using a letting agency to rent our house out?

The idea is that in 10 or 15 years our current house should easily be worth the £172,000 and the rental income over those 15 years or so would pay almost half our interest only mortgage and the interest only mortgage would only be £200 a month more than the mortgage would have been if we sold the current house and paid the £120,000 into the new sale.

It sounds too good a scheme to be true - have I not taken something ito account or are there risks involved?

Doozergirl · 23 April 2007 at 12:33PM

If it sounds too good to be true you're not doing the maths properly.

silvercar · 23 April 2007 at 12:33PM

we did something similar. We had a house chain all linked and then the FTB couldn't get a mortgage. We bought out that house and bought the house we were after.

The risks are that you are now responsible for maintenance on two homes and two mortgages. If you can be sure of getting a tenant in place quickly then you will have a rental income to help pay the mortgages, but it is a heavy financial commitment.

Incidentally, the way to structure it is to have a BTL (actually let to buy but same thing) mortgage on your current home. Generally you aim for at least a 15% deposit to get decent rates, possibly a bit more to ensure the rental pays the mortgage to satisfy lenders. You then take an ordinary mortgage on your new home with some deposit that you have released from your current home.

Andy_ArT_Trigg · 23 April 2007 at 12:38PM

Our current house is almost paid for (only 14 months) and we've been quoted only £22,000 to pay it off now - plus we have endowment policies that are guaranteede to pay more than £22,000 out in 14 months.

This means technically we'd only need to borrow £22,000 for 14 months or could even cash in the endowments now to mean we actually own the house we would be letting out. Does this make a difference? Does that turn it more into an invenstment than a liability?

Doozergirl · 23 April 2007 at 12:45PM

How can it be more investment than liability if you have a brand new, £172,000 mortgage?

:wall:

silvercar · 23 April 2007 at 12:51PM

This means technically we'd only need to borrow £22,000 for 14 months or could even cash in the endowments now to mean we actually own the house we would be letting out.

Generally not advised to cash in endowments so near their final bonus.

So you have a current mortgage of £22,000 and would need to borrow £172,000. That makes £194,000.

Probably sensible to have a mortgage of about £90,000 on the let house (mortgage interest is an allowable expense, so you won't have to pay tax on your rental income). That leaves £104,000 mortgage on your new house.

Interest only at 6% on £194,000 = £970 a month. What is the likely rental income? £400???

So you would be paying £570 odd on mortgages plus the cost of maintaining two houses.

I'm not saying don't do it, I'm just saying do it with your eyes open.

Andy_ArT_Trigg · 23 April 2007 at 2:19PM

Doozergirl wrote: »

How can it be more investment than liability if you have a brand new, £172,000 mortgage?

:wall:

I was thinking that if you own a house and you rent it out then you have some sort of investment there as you would be earning rental income and retain the capital value. I was thinking that's more of an invenstment than borrowing the money to buy a house in order to rent it out, or putting it another way, less of a liability.

Andy_ArT_Trigg · 23 April 2007 at 2:28PM

silvercar wrote: »

..you have a current mortgage of £22,000 and would need to borrow £172,000. That makes £194,000.

Probably sensible to have a mortgage of about £90,000 on the let house (mortgage interest is an allowable expense, so you won't have to pay tax on your rental income). That leaves £104,000 mortgage on your new house.

Interest only at 6% on £194,000 = £970 a month. What is the likely rental income? £400???

So you would be paying £570 odd on mortgages plus the cost of maintaining two houses.

I'm not saying don't do it, I'm just saying do it with your eyes open.

Thanks (This idea only entered my head because I keep hearing of all the people who are buying to let and with house prices so high there appears to be a lot of people who can only afford to rent so the rental market seems to be growing).

The rental value is about £500 to £550 a month in our area. A letting agent looking after it and dealing with everything would apparently charge 15% of the gross rent.

I'm finding it hard to undertand how I could borrow 90,000 on the let house though when I only need to borrow £22,000 for 14 months to own it outright and how I could only borrow £104,000 on the new house when it costs £172,000

silvercar · 23 April 2007 at 2:56PM

I'm finding it hard to undertand how I could borrow 90,000 on the let house though when I only need to borrow £22,000 for 14 months to own it outright and how I could only borrow £104,000 on the new house when it costs £172,000

Both properties would be your own, so how you arrange the mortgages is upto you. You borrow the £90,000 on the let property which clears your current £22,000 and gives you £68,000 in the bank. You use this £68,000 as a deposit on the new home along with a new mortgage of £104,000 to reach the buying price of £172,000.

I just suggested doing it that way round so you have mortgage interest as an allowable expense on the let property and you have a large deposit on the new place so can access a good mortgage rate. If you borrowed all £172,000 on the new place you would be getting a 100% mortgage which means a more limited number of lenders and probably a higher interest rate.

In practice you can do it whatever way round you want but to be most tax efficient and get the lowest interest rates seems sensible. Having sorted it for myself I'm probably one step ahead - decide if you want to do it first!

peter_D_4 · 23 April 2007 at 9:51PM

Read IR283 on the HMEC.gov.uk web site. If you fund your rental business with achange to your mortgage to a BtoL or a remortgage then interest up to the pro-rata value of the property at first let is deductable from your gross rental income. Even loans against other assets as long as the purpose is declared as 're-capitalisation of your rental business' are deductable agains the rental income You will need a formal written valuation on the poperty a few days before the first tenant signs the contract.
Now this rental property was your PPR so is exempt form CGT for 36 months then Letting Rellief kicks in and as you appear to be joint or tenant in common owners then this refief will offset any potential CG up to the vlaue of £40,000 each and will probably with taper relief and CGT allowance keep the property free of GCT for 9 years or more depending on the property growth.
You need to run some numbers and write down your options but if you want to make an investment for the future it may already be in your hand.
This is not advice but information, when you understand it you may wish to consult a local CTA and put a plan together. Regards Peter

Doozergirl · 23 April 2007 at 10:04PM

Andy_ArT_Trigg wrote: »

I was thinking that if you own a house and you rent it out then you have some sort of investment there as you would be earning rental income and retain the capital value. I was thinking that's more of an invenstment than borrowing the money to buy a house in order to rent it out, or putting it another way, less of a liability.

Assuming that the priority for us is to own our homes outright, you are still borrowing the full amount of you BTL property, albeit securing that debt against your main home. :eek:

If the market goes belly up, it's your home at risk, not your tenants'.

You'll be getting a return of 4.6% before you've allowed for any void periods between lets or any maintenance. You'll be borrowing money at more like 5.6% so you'll be making a loss of more than £1500 per annum without even blinking. I think you'd be mad. I'm a property developer and I simply don't see the point of BTL right now. I'd rather be buying those when they are cheap - you'd want a BTL to cover AT LEAST the cost of a repayment mortgage

otherwise you're just renting the house yourself!

Property prices are high - if I were looking for a investement, I'd be seeking it when the price of that investment was low, not high! We've seen huge rises over the last 10-12 years, why should we expect more? The sheer glut of BTLS hitting the rental market in some places is in fact driving rents DOWN!

Having a BTL because everyone else does is not a good reason for investing. It does not mean they are right. The general consensus on this board is that BTL is pretty pointless right now and more than a bit risky.

Is letting my house better than selling - (buying new house too)

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