BTL - mortgage or not?

mogadon

We have a mortgage free house that we currently rent out. The house we live in now is also mortgage free. It looks like OH's job might take us out of the country for 2-3 years, and we probably wouldnt move back to this house when we come back. Houses round here just aren't selling at the moment, so we'd probably look at letting this one out as well. Although it's not an ideal rental property, I have seen similar-ish ones to let in the area. Both houses would be let through an agent and would bring in about £500/month each after fees.

I am toying with trying to get an interest only BTL mortgage on at least one of the houses, purely to reduce the tax bill. AIUI we could offset the interest payments against the income tax that we would otherwise have to pay on the income. The borrowed money would go into cash ISAs and maybe a bond of some sort to get a bit higher interest. So that would also ensure we could definitely make the monthly payments if one was empty, and also we'd still have the cash to pay back the loan, if we needed to do so quickly.

First, is it legal to do that? Second is it a stupid idea? Third could we get a mortgage if they knew that's what we planned to do with the cash?

Thanks.

theartfullodger

It is legal to use a loan up to the value of the property when you 1st started renting it....

But remember B2L mortgages ain't always cheap... it may cost you more (eg 4% interest pa on the loan)to do this than you save in tax...(22% or 40% off the mortgage interest payments)]

Suggest you do the sums... then remember the last time the Cons go into power Interest rates went above 17% very very quickly and were above 10% for quite some time. (Yes, I remember, yes it hurt...)


Cheers!

Lodger

Jonbvn

If you are out of the country working, then you may become non-resident for tax purposes. This will have some consequences:

1. You may be able to get the rental income free of tax, provided your total UK income does not exceed the income tax threshold (£6.4k per annum - around £500 per month!)
2. You will be unable to contribute to ISA when you are non-resident.

theartfullodger

As Jon says... see

http://www.hmrc.gov.uk/cnr/nr_landlords.htm

Cheers!

Lodger