high interest only mortgage - is it worth doing ??

working_mum_3

I am considering renting out my house, and have been informed that the taxman can take 20% of the rental income after expenses. The interest paid on a mortgage is classed as an expense.

I need to remortgage before I rent out the house. If i were to remortgage to an interest only mortgage, so that the monthly interest equalled the rent i could achieve, then there would be very little "income" to tax me on as all the rent would cancel out the mortgage payments.

Now in order to have an i/o monthly mortgage of x (to match the rental income) i would need to remortgage for a lot higher than my actual mortgage is, therefore i would come away with a cash sum to invest in other ways.

Does this seem sensible, or in fact is it doable ? Have I missed something completely and would i be getting myself in trouble financially ?

MortgageMamma

Hi there working mum

UNless agreed by your current residential lender, you are unable to let out your property as it is a breach of your mortgage contract.

In order to rent out the property, you will have ot take a buy to let mortgage. This is a special mortgage which is designed for people wanting to rent out their property. You can only get a buy to let mortgage if your rental income is at, or exceeds 125% of your mortgage payment. Therefore theoretcially there will always been a taxable gain.

I have a specific section for landlords regarding buy to let taxation and the responsibilities of being a landlord on my website. If you want a link to it let me know, as I am not allowed to post it on here or I will be accused of touting for business (which incidentally I am not!)

HTH

MM

working_mum_3

Thanks MM,
i was thinking more along the lines of gaining the banks permission as this would only be a temporary thing. If I had the banks permission (ok - it might be at a higher rate) would this in theory work ?

Astaroth

Erm... why would you want to pay more money to your bank in interest rather than pay just 20/40% of it to the IR?

Mortgage interest of £500 rent of £1000 - offset is £500 income so £100-£200 tax and £300-400 in your pocket

Mortgage interest of £1000 rent of £1000 - offset is £0 income so nil tax and nil in your pocket

Unless I am missing something I cant see how you see the second as being favourable.

MortgageMamma

As astaroth says, I really cant see the point in what you are doing here, unless you are claiming benefits of some sort and don't want the impact of the extra income?

The bank might not grant you permission, it is purely at their discretion, and it varies lender to lender how they play this.

MarkyMarkD

MM

As a mortgage adviser, you should know better.

It is NOT necessary to have a "buy to let" mortgage to let your property. The only reason most people would need a "buy to let" mortgage is if they have more than one property - their own, with its normal residential mortgage, and their BTL property with its "buy to let" mortgage.

Even in those circumstances, if they have sufficient equity in their own residential property, they could remortgage the residential property to release capital to purchase the BTL property for cash - hence no need for a BTL mortgage.

In the OP's situation, the most obvious thing to do would be to get permission from their existing lender to let temporarily, which most lenders will give, at least for a period of time. Some will do so indefinitely.

Strictly speaking, interest is eligible for relief against your letting income if it is on a loan taken out to purchase the property*. Increasing the loan against your property to spend the money on something else would result in a loan which is not 100% eligible for relief. Increasing the loan to improve the property, for example, would be different and the whole loan would remain eligible for relief.

*Even if that loan is secured on a different property (e.g. your residential property) or not secured at all.

MortgageMamma

MortgageMamma wrote:

Hi there working mum

UNless agreed by your current residential lender, you are unable to let out your property as it is a breach of your mortgage contract.

In order to rent out the property, you will have ot take a buy to let mortgage. This is a special mortgage which is designed for people wanting to rent out their property. You can only get a buy to let mortgage if your rental income is at, or exceeds 125% of your mortgage payment. Therefore theoretcially there will always been a taxable gain.
HTH

MM

Marky Mark

You will see that before I even mentioned a buy to let I suggested that the OP should obtain agreement from current lender. I mentioned the BTL in the event that permission could not be obtained, as it is not always given.

Hope that clarifies things for you.

As a mortgage advisor, yes I do know better. Thankyou.

joepubli

MarkyMarkD wrote:

MM

Strictly speaking, interest is eligible for relief against your letting income if it is on a loan taken out to purchase the property*. Increasing the loan against your property to spend the money on something else would result in a loan which is not 100% eligible for relief. Increasing the loan to improve the property, for example, would be different and the whole loan would remain eligible for relief.

*Even if that loan is secured on a different property (e.g. your residential property) or not secured at all.

Actually this isn't stricly correct. You CAN increase the mortgage on a property and have it allowed for tax PROVIDED the increase does not take it above the market value of the property when the "letting business" starts. So if the property is worth £200k - loans upto this wshould be tax allowable. However if subsequently the value goes upto £300k you can't offset nother £100k of mortgage interest as the gain is pos the business period.
All very complex!
Joe

working_mum_3

Thanks for those replies. I don't know if I'm personally missing something, but the reason I thought of doing this fis to release the equity in the house for investment. If 100K goes in the bank at 5%, that's 5K gross interest (i'm a non taxpayer) and nothing for the tax man - except the bit that exceeds my personal allowance.

Therfore assuming i'm allowed to remortgage up to the value of the house, and my lender agrees I can let it, then i was thinking would i be better of having the interest in the bank and paying very little tax, rather than having the rent profit (less tax) earn bank interest at a more slower rate.

From the sounds of the replies, I should in theory be able to do it, but would need to do the actual sums to see if it stacks up.

regularsaver1

You need to be careful - your lender might agree to you letting property but at a different rate, at a certain loan to value and not nessarily allow you to transfer it to interest only

MarkyMarkD

MortgageMamma wrote:

Marky Mark

You will see that before I even mentioned a buy to let I suggested that the OP should obtain agreement from current lender. I mentioned the BTL in the event that permission could not be obtained, as it is not always given.

Hope that clarifies things for you.

As a mortgage advisor, yes I do know better. Thankyou.

I think I'd review the wording of my recommendations if I were you.

You said "In order to rent out the property, you will have ot take a buy to let mortgage." (sic)

I didn't read your reply to say:

(1) You should firstly try getting permission to let from your existing lender, as that will almost definitely be easier and cheaper; but
(2) If your existing lender will not give this permission, you may have to instead take out a buy to let mortgage ...

That's all I was saying!