Timelines on getting BTL Mortgage?

QTPie

herbiesjp wrote: »

I think they might be at some point:

Yes, although we don't want to rush into it.

herbiesjp

Well then there is no problem if you definitely want to go ahead.

You get the re-mortgage sorted out asap, and find tenants at the same time.

Most offer letters are valid for 3 months (some slightly longer).

So can have this all sorted, and then you can move out into your new rented place.

QTPie

silvercar wrote: »

The logic behind BTLs being interest only is to maximise the interest allowable as an expense for tax purchases. The exit strategy to clear the mortgage is to sell the property, so you wouldn't need a repayment vehicle.

Is there anywhere that explains this? (sort of a "Economics of House Letting 101"...). I am a pretty clever person (Masters degree in a numerate subject), but just new to the theory of letting a property.

Does the mortgage company not require you to have a repayment vehicle? For some reason I thought that mortgage lenders did or is it just they have to make you aware that you should have one?

So MOST (all?) BTL landlords are just speculating on the property market: they are ALWAYS assuming that they will sell for a lot more than they buy? I had always assumed that people kept the property, paid of the mortgage, then sold it... Am I being ridiculously niaive here? Sounds like it

Am having problems getting my head around it

QT

silvercar

Tax wise, the interest you pay on your mortgage is an allowable expense against the rental income whereas the capital element of a repayment mortgage isn't. So if you have an interest only mortgage, all your mortgage payment is an allowable expense.

Mortgage companies don't generally require repayment vehicles for BTL mortgages. As it is a business you can sell up when you have finished being a landlord, or if you wanted the capital or for any other reason. For a residential mortgage it is assumed that you will want to live in the property when you no longer have an income (retired) so you want to repay the capital at some stage.

BTL landlords are there for all sorts of reasons, some are speculating on capital growth, some are happy with the rental yield, some are just keeping a foot in the property ladder and some are there due to forced circumstance.

QTPie

Ok, I THINK that I am slowly getting it... Providing we completely intend to sell it before term, then there isn't really a downside in going Interest Only. Ok we don't increase our equity in it AND assuming that we can hang onto it until its value is favourable (or at least no less favourable than when you entered the mortgage) then we are fine.

So us releasing equity and renting our house out to cover the costs (using an Interest Only BTL mortgage) would be like an interest free loan on the released equity (i.e. the rent pays the interest)? Allowing us to move on now and release the equity properly (to pay off the BTL and hopefully that 40% deposit/equity back to us) when (or if?) the housing market has settled/picked-up again?

Of course if the bottom COMPLETELY fell out of the property market and the house was never worth anywhere near today's value again (even in 10/15 years), then we would be in for a loss in the equity that we hoped to release. If we kept 40% equity (deposit) in the house now, then HOPEFULLY we shouldn't go into negative equity.

Since we intend to move into rented accomodation initially and were able to get a £250k mortgage against a £420k property (60% LTV). If we managed to get a mortgage payment of about £1100 a month (interest only) and were able to offset £120k of that (whilst we were renting), then we would be looking at interest payments of about about £500 a month. So we would only pay tax on the rental income less the payment and the agency fees.

Am I along the right lines here - even if I have worded things rather clumsily...?

QT

silvercar wrote: »

Tax wise, the interest you pay on your mortgage is an allowable expense against the rental income whereas the capital element of a repayment mortgage isn't. So if you have an interest only mortgage, all your mortgage payment is an allowable expense.

Mortgage companies don't generally require repayment vehicles for BTL mortgages. As it is a business you can sell up when you have finished being a landlord, or if you wanted the capital or for any other reason. For a residential mortgage it is assumed that you will want to live in the property when you no longer have an income (retired) so you want to repay the capital at some stage.

BTL landlords are there for all sorts of reasons, some are speculating on capital growth, some are happy with the rental yield, some are just keeping a foot in the property ladder and some are there due to forced circumstance.

silvercar

First 3 paragraphs seem fine.

Para 4 is confusing. You would be getting a 250k mortgage on a property value of 420k (60% LTV), so your payments were about £1100 a month say. Now you want to look at the rental income. Most lenders will require that your rental income at least covers your mortgage payments, so I would imagine that a 420k property should get a rental income of at least £1400 a month assuming a 4% yield (annual rent divided by value). Once you take other fees into consideration like agents fees, insurance etc you will be left with no serious profit to tax.

Offsetting the mortgage is going to confuse the tax situation. For the moment consider that your 120k is invested elsewhere. You can probably find a high interest notice account or an ISA and get about 3-4% on your savings after tax.

QTPie

silvercar wrote: »

Para 4 is confusing. You would be getting a 250k mortgage on a property value of 420k (60% LTV), so your payments were about £1100 a month say. Now you want to look at the rental income. Most lenders will require that your rental income at least covers your mortgage payments, so I would imagine that a 420k property should get a rental income of at least £1400 a month assuming a 4% yield (annual rent divided by value). Once you take other fees into consideration like agents fees, insurance etc you will be left with no serious profit to tax.

Yes, I agree with you completely ("realistic rental value" is £1350pcm). The idea for this property is for it "pretty much" to pay for itself. So we don't expect any profit out of it, but (hopefully) wont have to spend any money on it either.

silvercar wrote: »

Offsetting the mortgage is going to confuse the tax situation. For the moment consider that your 120k is invested elsewhere. You can probably find a high interest notice account or an ISA and get about 3-4% on your savings after tax.

So that (putting the savings seperately) is likely to be better than off-setting against the mortgage? I can certainly see it is going to be simpler. I will start looking into specific sums for that to compare, thank you.

Another thing that has struck me. Where do we stand tax-wise when we come to sell the BTL - would we loose out then?
- bearing mind if we sold our current house now and then bought straight away, we wouldn't have to pay tax on the sale of our home.
- if, as we are proposing, we let this house out, rent another house ourselves but go on to buy another home (which will then become our primary residence), then where do we stand when we come to sell the one that we are renting out (i.e. our home at the moment). Presumably then it is our second home. Do we have to pay tax on the "sale price" - "the mortgage"?

Thanks - I am learning so much (all really interesting too!)

QT

socrates

QTPie wrote: »

Thanks - I am learning so much (all really interesting too!)

QT

Be careful all the BTL haters will crucify you.

The mere fact that you find the world of a BTL LL interesting.

BTW the other people in your thread are giving you straight no nonsense advice and they know exactly what they are talking about - not like most of the know it all BTL LL haters who come out with utter drivel as long as it against LL's

You are a new breed of LL - a forced one.

You are lucky you have this board - try LandLordzone.com as well

QTPie

I must be getting old (I was 35 yesterday... ), but the whole property thing is interesting... Until I started reading this forum, I was just thinking as a seller (because I was trying to sell). Now I have learnt a lot about buyers and BTL too. It is interesting how things work and how people think.

I definitely appreciate all of the advice - it is really opening my eyes: I had a few ideas about how I "thought" things work, people here are dispelling the myths and putting my straight. Invaluable :cool:

I would definitely rather sell than let out (just to keep things simpler and have less to think about), but this seems like a good way to keep life moving without having to undercut a continually slipping market.

Being gazundered REALLY put a bad taste in my mouth: We had a reasonable asking price (less than what an identical house had just sold for), we came down considerably further to accept an offer less than what we wanted, then we STILL got gazundered by a substantial amount (just four weeks after the original offer accepted and three weeks before their demanded completion date). By the time we got back to the market (6/7 weeks after the we had accepted the offer), the market had dropped further. So just makes you think "how low do we have to go" if we want to move on? Maybe letting out our current house out instead (at least until the market settles and sellers know where they stand again - without having to place themselves over a barrel...) is the way to move on?

Very luck. Will check out your link too. Thank you

QT

socrates wrote: »

Be careful all the BTL haters will crucify you.

The mere fact that you find the world of a BTL LL interesting.

BTW the other people in your thread are giving you straight no nonsense advice and they know exactly what they are talking about - not like most of the know it all BTL LL haters who come out with utter drivel as long as it against LL's

You are a new breed of LL - a forced one.

You are lucky you have this board - try LandLordzone.com as well

silvercar

Tax

Two parts: income tax and capital gains tax on sale.

Income tax we have probably covered. By the time you include all your expenses, including the mortgage interest, you wont be making a profit. If you make a loss that is carried forward to the next tax year, but can only be used against any profits on rental income not earned income. So there probably won't be any profits to pay tax on for a few years at least.

Capital gains tax (CGT) comes into effect when you sell the property. There is exemption for the time it was your principal private residence (PPR) and the last 3 years of ownership. You also have a personal CGT allowance (currently 9,600) and would be eligible for letting relief, worth upto 40k. CGT won't bother you for a good few years.

From my personal experience (I bought a BTL to hold a house chain together in 2006) you will lose money for a few years. Not much if it is let to a decent tenant, but you should be prepared to be out of pocket for a few years. Ive just filled in my second tax return with losses carried forward on the BTL.