Shifting mortgage to rental property?

lynneinjapan

I got married last year and my husband has moved in with me, and is planning to rent out his house. Both of us are quite sensible financially and have 3-bed semis, each with only around £20-25K outstanding on the mortgage. He is planning to change his mortgage to a buy-to-let one, since the house is no longer his main residence, and the minimum they'll lend on a BTL is £40K, so he's suggesting we pay off my mortgage and borrow on that one instead. This may sound a bit daft, since the interest rate on a BTL mortgage is usually a bit higher than on an owner-occupied one, but the idea is that we offset the rental income against tax, since the interest element of the mortgage can claimed as an expense so you don't pay tax on it.

We're both lower-rate taxpayers (combined gross income £50-odd K) and the house will be rented out for around £600, slightly more if we're lucky. Agents' fees will come out of that so we'll end up with something in the region of £500 per month (depending on how long the tenants stay put). Not sure yet how much mortgage payments will be, it depends on the term he goes for - I imagine that a term of around 10-12 years would be needed for the payments on a repayment mortgage to be covered by the rental income (leaving a small amount over for repairs etc.)

Does this sound like a sensible approach? The alternative would be to pay off the mortgage on his house and put it all onto my mortgage (possibly re-mortgaging my house), which AFAICS might give us a lower interest rate but would lose us the tax benefits. There's no "stay as we are" option because if he's switching to a BTL mortgage then the minimum he can borrow (at least from his current lender, whom he's tied into at the moment because of early redemption penalties) is £40K.

don9999

I did very similar to your situation a few years ago - except we were moving to a new family house and letting our old one. I obtained a new buy-to-let mortgage on the old house and used it to pay off most of the new house. Interest was marginally higher, but as you say, you can set off the interest against the rental income. Indeed, I calculated the buy-to-let mortgage, such that the interest cost was as close as possible to the rental income (less other allowable expenses). Tax bill was minimal on the rental property.

The only difference I see is that I didn't pay agent's fees. Or at least, no monthly fee. I paid the agent a finding fee of a few hundred pounds and then nothing thereafter. So the £699 rental income was all mine. OK, this has the disadvantage, that if the tenants have any problems - faulty heating, doors, whatever, then 'I' would have to arrange to get them fixed. But I didn't see that as much of a problem, and 'I' would have to pay for the repais whether 'I' orgainsed it, or the agents did. I only see any advantage of an agent managing a property, if you live a long way away from the property. And even then, you can still do it by phoning a local builder/plumber whatever to fix the fault. As it happens, there were no problems in the year or so I let the property. That's about £1,200 saving in agent's fees!

Cheers,
Don

gallygirl

Have a good look - there are some v good buy to let deals around. I'd recommend upping mortgage on BTL - but preferably go for a 25 year term which allows monthly overpayments - that way you can control what you pay, so if you do have large bills or voids you can cut back temporarily.

Best bet would be offset BTL. Bristol & West do one, but high interest rate. This seems so obviously the best solution for BTL I can't understand why all companies don't do it.

lynneinjapan

Thanks for your replies - it sounds as if we're on the right track then. I think he'd considered shopping around for alternative BTL deals - he's been wanting to remortgage for quite a while - but the early redemption penalties have meant that it wouldn't be financially worthwhile.

He hasn't actually firmly decided whether to have an agent manage it or to do it himself. It's only a mile away from where we live now so self-management is probably very feasible. After all, that's what we were doing when we each lived in our own house!

Hadn't thought about taking out the mortgage over a longer term. When I originally took out my own mortgage (£38K) I only took it for 15 years - I think that cost an extra £100 or so per month but saved about £30K over the life of the mortgage - and the longer the term, the higher a proportion of your monthly payment is taken up by interest at the beginning. But of course, when the interest payment is offset against tax, that's a different matter!

So we need to:
(a) Find the best deal available (offset or otherwise)
(b) Work out the best term to minimise both total cost of repayment and annual tax bill (the latter by getting the interest element of the repayment to be almost as much as the rental income, just leaving enough over for other expenses such as Corgi certificate, agents' setup fees etc.)
(c) Do the same for the deal available with his existing lender and see whether the early redemption penalties make a switch worthwhile
... and of course decide whether to get an agent to manage it or to do it ourselves.

cash99

The loan does not need to be secured on the property you are letting, nor does it need to be a buy to let mortgage to claim the interest as a deduction against the letting income.

You can in fact get tax relief on a loan up to the market value of the property on the day it is first let.

If you re-mortgage the property you are living in, pay off both loans, then you should be able to claim a tax deduction for the interest on the bnew combined loan against the letting income.

Post a question on the tax forum, and see if anyone has done this before, and if there are any other issues to be aware of.

don9999

That is almost exactly what 'I' did a few years ago. However....be weary about asking a question on a tax forum. Even tax specialists can't agree whether you can set off a new (re-mortgaged) loan against rental income.

Indeed, after getting a variety of replies from various tax inspectors (including from a top four accountacy firm) I went direct to my Inspector of Taxes. Even 'he; had to refer it to some of their internal specialists.

Finally they came back, and as you say, I was allowed to set off interest on a mortgage for the letting property, up to the value of the house when first let.

Am not sure whether you can set off interest from the mortgage on a 'different' house though - I suspect it still has to be the actual home that is being let. Whether it is a buy-to-let mortgage or not is probably not significant, although most lenders probably won't give you an 'ordinary' mortgage for a house that is being let (though I have heard some who have done).

In 'my' case, I was buying a new house, and moving out of a hour (that had no mortgage) and letting that old house. I re-mortgaged the old property (with a buy-to-let morgage) and used the proceeds to pay for my new house. I was then able to set off the interest on the buy-to-let mortgage against rental income.

Hope this helps.

Cheers,
Don

cash99

don9999 - I know this is an area of confusion even for accountants. However the situation has been the same for some time.

You are entitled to withdraw capital from a business, and replace this with a loan, the interest on which you can then set against the income of the business.

Why is this relevant, well since the 1995/1996 Finance act letting income (Schedule A in tax parlance ) has been calculated on the same basis as business income ( Schedule D in tax parlance).

Hence you can claim interest on a larger loan than one you had on the property before you let it.

I think the OPs existing loan on the house they are going to live in would not qualify, hence the reason they would need to remortgage.

This earlier thread on the tax forum covers part of the issue.

http://forums.moneysavingexpert.com/showthread.html?t=40411&highlight=rental