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    • CDB199
    • By CDB199 28th Nov 17, 9:20 PM
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    CDB199
    Second home tax, mortgage etc options
    • #1
    • 28th Nov 17, 9:20 PM
    Second home tax, mortgage etc options 28th Nov 17 at 9:20 PM
    Recently paid off mortgage on home and thinking of purchasing second property and using rental income on first place to pay towards new mortgage.


    Firstly, will lenders accept this rent as an income so I can potentially borrow more? (value 400k ish, rental 1300+ pcm)


    With changes in stamp to buy second property, what options do I have long term? Was discussing this with someone recently and they suggested I may be able to call this new property my main residence, and when selling offset any capital gains against the stamp duty paid? or am I muddling up here?


    any advice helpful.
Page 1
    • p00hsticks
    • By p00hsticks 28th Nov 17, 9:33 PM
    • 5,783 Posts
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    p00hsticks
    • #2
    • 28th Nov 17, 9:33 PM
    • #2
    • 28th Nov 17, 9:33 PM
    Recently paid off mortgage on home and thinking of purchasing second property and using rental income on first place to pay towards new mortgage.


    Firstly, will lenders accept this rent as an income so I can potentially borrow more? (value 400k ish, rental 1300+ pcm)


    With changes in stamp to buy second property, what options do I have long term? Was discussing this with someone recently and they suggested I may be able to call this new property my main residence, and when selling offset any capital gains against the stamp duty paid? or am I muddling up here?


    any advice helpful.
    Originally posted by CDB199
    Which actually IS going to be your main residence - You have to actually be living in your main residence. If you are renting it out it cannot be your main residence.

    You talk about 'using rental income on first place'. So are you going to rent out your existing property or the new one ? You will need a Buy to Let mortgage to buy the new property if you intend to rent it out, which will take account of the proposed rental income but I think will need you to provide around 25% deposit.

    If you currently own one property and buy another one you will have to pay the 3% SDLT surcharge. If you are currently living in the first property and move into the second one when you buy it , then you can get a refund of the surcharge if you subsequently sell your original property within a certain time period (I think three years).

    Ther will be a potential Capital Gains tax liability on any profit you make when selling any property that has not been your main residence throughout your ownership, but there is relief for any time you are actually living in it and periods where you are letting it.
    • 00ec25
    • By 00ec25 28th Nov 17, 9:50 PM
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    00ec25
    • #3
    • 28th Nov 17, 9:50 PM
    • #3
    • 28th Nov 17, 9:50 PM
    Recently paid off mortgage on home and thinking of purchasing second property and using rental income on first place to pay towards new mortgage.

    Firstly, will lenders accept this rent as an income so I can potentially borrow more? (value 400k ish, rental 1300+ pcm)
    Originally posted by CDB199
    no, most (not all) lenders will totally ignore any rental income when considering how much you can borrow for the purchase of a main house.

    a rental property is viewed as a self contained entity that wipes its face, not as a supplement to your income, since rent can be turned off on a whim, whereas salary from a job can't ... (in theory!)
    (value 400k ish, rental 1300+ pcm)
    Originally posted by CDB199
    as an investment you are looking at a gross yield of 3.9%

    that is low (6% is fair, 10% is good but comes with other compromises)

    what else does this house have going for it which makes it worthwhile retaining given it is now mortgage free and thus represents £400k locked up in it?

    With changes in stamp to buy second property, what options do I have long term? Was discussing this with someone recently and they suggested I may be able to call this new property my main residence, and when selling offset any capital gains against the stamp duty paid? or am I muddling up here?.
    Originally posted by CDB199
    yes you are muddled

    for tax efficiency purposes you should look to mortgage the rental property to the hilt (ie to 75% LTV max allowed) under a "Let to Buy" mortgage so that the interest on that mortgage is allowable against the rental income.

    The money borrowed on the LTB property (ie 400 x 0.75 = £300k) can then be spent as a lump sum on buying your new house.

    if your new main home will cost more than 300k you can of course supplement that by taking out a mortgage on the new residential home, but none of that latter loan's interest will be tax deductible against your rental profits income tax liability.

    the residential property loan would of course be based purely on your salary income multiple (ie. the usual affordability calculation), without any account taken of the rental income.

    as you intend to keep the rental property (your ex main home) there is no way to avoid paying the higher rate SDLT on purchase of the new residence since you are not "replacing" your old home with a new home, you are instead increasing your property empire by +1.

    if you sell the rental/ex home within 3 years of buying the new residence you could claim a refund of the SDLT higher rate. If sold after 3 years you cannot

    when you do finally sell the rental/ex home you will be liable to CGT as it is no longer your main residence. Implications of that are:
    - because it was once your main home you will be able to claim private residence relief and letting relief against the gain on the old home
    - obviously the gain will also be after you deduct the legal and estate agents fees associated with its original purchase and its sale. If you paid SDLT on the original purchase of that ex home you can also deduct that from the gain
    - You cannot offset the higher rate SDLT you paid on purchasing the new home against the CGT due on the old one

    typically, CGT relief for an ex home means it is unlikely you will pay any CGT unless the property has massively increased in value and/or you lived in it for a short time as main home and let it out for a long time
    Last edited by 00ec25; 28-11-2017 at 9:56 PM.
    • Cakeguts
    • By Cakeguts 28th Nov 17, 11:27 PM
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    Cakeguts
    • #4
    • 28th Nov 17, 11:27 PM
    • #4
    • 28th Nov 17, 11:27 PM
    What sector of the market do you think you are going to let to in your area? For that rent to work you are going to have to have tenants that stay for several years so if you let to the wrong part of the rental market and get a lot of voids you are not going to have a very good business. The point is that if you get this wrong you could get £1300 for 6 months and then have 3 months vacant while you struggle to find another tenant. To get a rental property to work properly you don't want it to be vacant at all.

    What a lot of people do is they don't approach the letting business properly. They work on the wrong idea that any old house will do. So someone happens to have a house they used to live in and they think it will be wonderful to let. It really doesn't work like that. Owner occupiers look for different things in houses. An owner occupier will make more compromises to get a house that they like because they might stay there for several years. A tenant could leave after 6 months. What they often want is convenience and something that is cheap to run. It is like any other business you have to have a product that people want to buy. You are selling space for people to live in.
    • getmore4less
    • By getmore4less 29th Nov 17, 5:11 AM
    • 30,781 Posts
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    getmore4less
    • #5
    • 29th Nov 17, 5:11 AM
    • #5
    • 29th Nov 17, 5:11 AM
    Recently paid off mortgage on home and thinking of purchasing second property...........
    Originally posted by CDB199
    start with do you have a deposit for the new place?
    • CDB199
    • By CDB199 29th Nov 17, 7:40 AM
    • 34 Posts
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    CDB199
    • #6
    • 29th Nov 17, 7:40 AM
    • #6
    • 29th Nov 17, 7:40 AM
    Sorry, should’ve been more clear. Plan would be to rent out current property I have that is now mortgage free; then purchase a second home to live in and renovate.
    • CDB199
    • By CDB199 29th Nov 17, 7:46 AM
    • 34 Posts
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    CDB199
    • #7
    • 29th Nov 17, 7:46 AM
    • #7
    • 29th Nov 17, 7:46 AM
    Yes, have decent deposit for second place.

    Hoping to achieve at least £1300 pcm on current property, use this as source of income to borrow more. But sounds as if this isn’t viable?
    Not planning on a btl mortgage for new place, as this will now be my primary residence.

    Understand the implications of renting it out as brought up in earlier replies. Guess I have to look to rent out on longer contract.
    • CDB199
    • By CDB199 29th Nov 17, 7:49 AM
    • 34 Posts
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    CDB199
    • #8
    • 29th Nov 17, 7:49 AM
    • #8
    • 29th Nov 17, 7:49 AM
    What sector of the market do you think you are going to let to in your area? For that rent to work you are going to have to have tenants that stay for several years so if you let to the wrong part of the rental market and get a lot of voids you are not going to have a very good business. The point is that if you get this wrong you could get £1300 for 6 months and then have 3 months vacant while you struggle to find another tenant. To get a rental property to work properly you don't want it to be vacant at all.

    What a lot of people do is they don't approach the letting business properly. They work on the wrong idea that any old house will do. So someone happens to have a house they used to live in and they think it will be wonderful to let. It really doesn't work like that. Owner occupiers look for different things in houses. An owner occupier will make more compromises to get a house that they like because they might stay there for several years. A tenant could leave after 6 months. What they often want is convenience and something that is cheap to run. It is like any other business you have to have a product that people want to buy. You are selling space for people to live in.
    Originally posted by Cakeguts
    Can see this. Some thought has to go into who potentially would rent it out.
    Ideally on long term let, maybe to retirement sector. Rather than gap fillers
    • 00ec25
    • By 00ec25 29th Nov 17, 10:52 AM
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    00ec25
    • #9
    • 29th Nov 17, 10:52 AM
    • #9
    • 29th Nov 17, 10:52 AM
    Hoping to achieve at least £1300 pcm on current property, use this as source of income to borrow more. But sounds as if this isn’t viable?
    Not planning on a btl mortgage for new place, as this will now be my primary residence..
    Originally posted by CDB199
    you do not seem to have understood what I wrote (or have decided to ignore it?)

    you release the max amount of cash you can from the let property as a lump sum of cash by taking a let to buy mortgage on that, and top that up (if needed) with a (smaller) mortgage on the new home

    the "normal" rules for LTB would be the rent has to be at least 130% - 140% of the interest payable on the loan using a 6% interest rate. If you meet those criteria then the property is wiping its face and your income is not a factor in deciding how much you can borrow. Patently 1,300 pm potentially gives you up to 200k of borrowings, which is well within the 75% LTV limit on a 400K house but does reflect the fact its rental yield is low. All of that annual interest charge of £12k per year will then be allowable against the rental profits.

    so with a cash deposit of 200k on the new main residence you would then need an income based "normal" mortgage to top you up to whatever is the price of the new home.

    if you don't have a mortgage on the rental property you will be paying more tax on the rental income than you need to whilst at the same time having a 200k larger normal mortgage on the main home. none of which is tax deductible.
    • drilleruk01
    • By drilleruk01 29th Nov 17, 1:06 PM
    • 4 Posts
    • 1 Thanks
    drilleruk01
    the "normal" rules for LTB would be the rent has to be at least 130% - 140% of the interest payable on the loan using a 6% interest rate. If you meet those criteria then the property is wiping its face and your income is not a factor in deciding how much you can borrow. Patently 1,300 pm potentially gives you up to 200k of borrowings, which is well within the 75% LTV limit on a 400K house but does reflect the fact its rental yield is low. All of that annual interest charge of £12k per year will then be allowable against the rental profits.

    Be careful - the annual interest is taxable under new rules depending on whether you are a basic/higher/additional rate tax payer. Historically this was true, but there are new taxation rules filtering in over a four year period, starting from April of this year until April 2021.
    • 00ec25
    • By 00ec25 29th Nov 17, 2:07 PM
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    00ec25
    the "normal" rules for LTB would be the rent has to be at least 130% - 140% of the interest payable on the loan using a 6% interest rate. If you meet those criteria then the property is wiping its face and your income is not a factor in deciding how much you can borrow. Patently 1,300 pm potentially gives you up to 200k of borrowings, which is well within the 75% LTV limit on a 400K house but does reflect the fact its rental yield is low. All of that annual interest charge of £12k per year will then be allowable against the rental profits.

    Be careful - the annual interest is taxable under new rules depending on whether you are a basic/higher/additional rate tax payer. Historically this was true, but there are new taxation rules filtering in over a four year period, starting from April of this year until April 2021.
    Originally posted by drilleruk01
    you will note I said allowable. I did not say deductible

    eligibility of interest has not been altered. The new rules relate to the calculation method, not the principle.

    the issue I am illustrating is that having a mortgage on the let property is significantly more tax efficient than paying tax on the full rental income and then spending that net income on a residential property mortgage upon which no interest is eligible. The rule is to do with "withdrawing capital from a business"
    Last edited by 00ec25; 30-11-2017 at 12:31 PM.
    • CDB199
    • By CDB199 30th Nov 17, 10:11 AM
    • 34 Posts
    • 1 Thanks
    CDB199
    Hadn't considered his as an option before now so many thanks for posting. Food for thought indeed and great option to maximise my tax efficiency.
    • kingstreet
    • By kingstreet 30th Nov 17, 10:20 AM
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    kingstreet
    Recently paid off mortgage on home and thinking of purchasing second property and using rental income on first place to pay towards new mortgage
    Originally posted by CDB199
    If the property is unencumbered, there are lenders which take the rental income into account for residential mortgage affordability.
    I am a mortgage broker. You should note that this site doesn't check my status as a Mortgage Adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice. Please do not send PMs asking for one-to-one-advice, or representation.
    • 00ec25
    • By 00ec25 30th Nov 17, 10:43 AM
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    00ec25
    If the property is unencumbered, there are lenders which take the rental income into account for residential mortgage affordability.
    Originally posted by kingstreet
    interesting, in that case some number crunching will reveal which is "cheaper" (and some faith in the future direction of taxation policy!)

    - unencumbered let property, (large) residential mortgage at residential mortgage interest rates. Rental income less full tax taken into account in overall income level. No tax relief on mortgage

    - mortgaged let property at BTL interest rates, + (small) residential mortgage at residential mortgage rates. Rental income not taken into account, but profit on rent is "tax efficient" in that it is after allowing for mortgage interest
    • Freecall
    • By Freecall 30th Nov 17, 12:29 PM
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    Freecall
    I may be able to call this new property my main residence
    Originally posted by CDB199
    I don't see why not.

    Although 'My main residence' is an unusual name for a house it's a lot more imaginative than 'Dunroamin'.

    • kingstreet
    • By kingstreet 30th Nov 17, 1:17 PM
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    kingstreet
    interesting, in that case some number crunching will reveal which is "cheaper" (and some faith in the future direction of taxation policy!)

    - unencumbered let property, (large) residential mortgage at residential mortgage interest rates. Rental income less full tax taken into account in overall income level. No tax relief on mortgage

    - mortgaged let property at BTL interest rates, + (small) residential mortgage at residential mortgage rates. Rental income not taken into account, but profit on rent is "tax efficient" in that it is after allowing for mortgage interest
    Originally posted by 00ec25
    Yup. Needs accountant and mortgage broker assistance to piece this together. Certainly outside the scope of this place with the amount of information required to do it properly.
    I am a mortgage broker. You should note that this site doesn't check my status as a Mortgage Adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice. Please do not send PMs asking for one-to-one-advice, or representation.
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