Let to buy or sell?

busylizzy99

Hi - We are looking to move to a three bed house. We currently own our terraced house worth about 110k and have saved about 80k to put towards the new one.We have lived here for 10 years.
However my sister rents a tiny place and would be interested in renting ours for £520 a month. Obviously we would have good tenants and would be able to let directly and not through an agent. We could borrow about 125k from the bank. I was thinking of having a repayment mortgage on our current house for 100k over 25 years(best for tax?) and then 25k repayment over 25 years on the new property.We could then look for a property for about 200k(taking into account our savings).
I would be doing my sister a favour to let to her but hope it makes financial sense for us too.
However I worry about CGT if we sell later as when we bought our house it was 52k, now its worth 110k. Will we just be paying loads of interest to the banks with no benefit for us?
Does it make more sense to sell? If we sold we would have 110k+80k savings so 190k and then take out a small mortgage to look for a property upto 250k rather than being limited to the 200k we if let to buy.
Am trying to look into it but am not sure what do and would really appreciate some advice as I know there are some very knowledgeable people on here!Thank you!:j

Cannon_Fodder

Mixing family with money or contractual arrangements is a tricky area, imo.

You'd be limited by your income and 75% of LTV for a buy-to-let. You could try for temporary consent-to-let, but to give your sister peace of mind I think it would be sensible to make sure your Lender is amenable to long-term letting out, and therefore the costs involved to you and the rent she could expect to pay. On £100k, £520 a month doesn't leave any leeway at today's interest rates, by the time you've paid for upkeep/buildings insurance etc. You would be subsidising it, which is fine if planned that way and things stay static. But if upkeep/interest/insurance costs changed, would you continue to absorb it all?

Suppose you set the plan in motion, your sister was there 9 months, then she got a partner/better job/insert choice of life-changing event here, and the house was no longer any use to her. Would she feel obliged not to let you down, creating a gradually increasing resentment. Or would you feel resentment on being let down?

Or if interest rates shot up and you "needed" to increase the rent to help cover it. Would she be offended, expecting "family discount". Would you feel unable to increase the rent, absorbing more yourself, and building up a resentment if maybe she didn't know or appreciate that that was the case.

You sound like you would end up having a house of lesser potential, if I have read your "limited to £200k" comment correctly. Will that create a "we've made a sacrifice" mentality, which festers if not appreciated. In years to come, will you regret not making the jump further up the ladder?

A minefield of future expectations, imo. Sell - to your sister?

G_M

Never rent to family or friends. If she loses her job or whatever you'll be in the invidious position of choosing between evicting her or going without rental income.

Pete111

On the CGT issue you have three years after moving where CGT does not apply. This is due to your living in the property as your primary place of residence prior to renting it out

Taking out a mortgage on the rental property is sensible from a tax perspective but you should do this on an interest only basis as you can only offset mortgage interest payments against rental income (assuming you were planning to declare this) However, the downside is that as you have no mortgage to convert to B2L you may have to take out a specific buy to let mortgage which (assuming you can get) will be expensive and most likely limited to no more than 75% LTV max .

In terms of cost against benefit you need to work out what the extra interest payments + all costs (minus rental income) of being a landlord (try the landlord zone website for advice) would cost you over time as effectively you are gambling on house price rises in the next few years being greater than this amount by taking this approach.

Other things to factor in are the general hassle of running a property, potential issues with your tenant being your sister (what if she loses her job etc - could you kick her out?!) and whether the extra cash released by the sale would result in a significantly better property/area for you and your family.

Good luck whatever you decide - but if you choose to keep the property make sure you have done all the sums first!!

Fire_Fox

IIRC don't some lenders make a condition of BTL or consent to lease (not sure which) that you do not let to family?

busylizzy99

Thanks for all the thoughts, much appreciated!

Thought it was a good idea to let as a long term investment but am definitely having second thoughts now. My sister and partner would be jointly paying the rent and have two children so if one lost there job the other would go full time(she only works weekends currently).

I think we could cope with a small interest rise but I can see that we might end up being worse off in the end.

My main thought was that being chain free might put us in a postion to offer a lower price on a property where someone wants to move now.

Would it make sense to rent it out just for 3-5 years and then sell and pay off the mortgage to avoid capital gains but be chain free buyers?

Thanks again for all the thoughts and ideas it's nice of people to lend there expertise!

Fire_Fox

If you want to be chain-free to drive a hard bargain, then price your existing home to sell! There's nothing inherently wrong with letting the house as long as you are willing and able to invest plenty of time understanding the mountain of legislation you must comply with. To do this join a landlord's association and attend some workshops. It's letting the property to family that is the concern: your lender may prohibit this anyway.

If one partner loses their job you cannot rely on the fact that the other can go full time as there may not be a job available, secondly if one is ill or injured they will not be able to take care of the children so the other will not be able to work. If they need to claim benefits you may well have a time without any income as LHA is paid in arrears. Would you be willing to evict your sister and her children? What if the couple split up? Can you afford two mortgages and for how long? If you are not willing to evict your sister she will not be eligible to claim LHA as this will not be a commercial tenancy.

Nosht

busylizzy99 wrote: »

If we sold we would have 110k+80k savings so 190k and then take out a small mortgage to look for a property upto 250k rather than being limited to the 200k we if let to buy.
Am trying to look into it but am not sure what do and would really appreciate some advice as I know there are some very knowledgeable people on here!Thank you!:j

It may be difficult to arrange a "small mortgae" as most lenders have a minumum amount. :eek:

Regards,

N.