BTL advise please

ekroys17

I purchased a 2 bed apartment in June 2007 as a BTL, it was a new build and I paid £124,800. I took out an interest only mortgage for £72k. The difference was inheritance from my Aunt.

Fast forward 3 years and my Interest only mortgage with the Chelsea is coming to an end. Chelsea have decided to increase their interest rate to 5.79% or £350 per month.

I am in a dilema - do I look to sell - I have a tenant in until Aug and they could extend. So I am unable to sell until then. - I have contacted an estate agent today to see if I can get a valuation - they have called me back to say that the apartment is now 3 yrs old and the site has been developed so there are quite a few apartments that are brand new that the developers are trying to sell for £93 - £95K.

I have now decided that I am not that desperate to sell for £30k less than what I paid for it. The plan was to sell and use the equity to pay off the majority of my mortgage on my residential address.

So, my OH is disappointed that no capital is being paid off the mortgage, so I was wondering can we change to mortgage from a BTL to a repayment mortgage. I have called a few lenders regarding a BTL mortgage and many have stopped doing BTL or demand at least 50% LTV.
I have currently 60% LTV.

Your advise please.

dimbo61

Can you not just make capital payments off the IO mortgage each month
and stay with the BTL for the long term

Snippa

I was wondering can we change to mortgage from a BTL to a repayment mortgage.

It isn't one or the other. Any mortgage - BTL or residential - can be either interest only or repayment. So you can keep the mortgage as BTL, but switch to a repayment mortgage, which will mean the capital is gradually being paid off.

At the moment, lenders are less keen to give BTL, and also less keen to give IO, so you might get a better rate if you switch to repayment. Also it does go on LTV, which is loan to value. You say your mortgage is £72K. If the value is now £95K that's around 75%, not 60%. A new lender will calculate in on what they value the flat at, so that might make a difference.

VIGILANT22

You dont get better rates for a repayment mortgage!
Interest only is the most tax efficient way of arranging BTL as you are allowed to offset the mortgage interest payments against any tax you might be liable for on the rental income.... tax benefit only applies to the interest and not to any repayment of the capital which would be liable for tax......
BTL mortgages max ltv 75%
Rental income 125% of mortgage payments
Some lenders require a min income of 25k exc rental income
This is general criteria
Rates lower than 5.79% are available

getmore4less

ekroys17 wrote: »

.....there are quite a few apartments that are brand new that the developers are trying to sell for £93 - £95K.
......
I have currently 60% LTV.

Your advise please.

I don't think you have 60% LTV more like 77%

Why does the OH have a problem with paying off the capital.

She should be more worried abut the appalling investment so far.

What rent do you get?

ekroys17

Thanks for the advice, We get £550 pcm, and the letting agent takes 10% +vat. We leave the residue in an account which we don't touch incase we have times when the property is vacant.

we have been lucky and only had about 5 weeks where it was unoccupied in the past 3 yrs.

getmore4less

Gross yield 5.3% on purchase not that good.
4.7% after agents fees
Less after other costs.

Why risk that inheritance for such a low return especialy on a new build that are known to lose money relative to the market.

With the new rate of 5.79% you are making a loss on the mortgaged part reducing the return on your investement.


£485 rent £5820
£72k @ 5.79% is £4169
£1651 before other costs

£52800 invested so 3.1% before tax.

If you can keep costs and voids down then ride it out you will not lose too much.

What were your buying costs? are they included.
Then there will be the selling costs.

You need to reduce the cost of borrowing.

How big is your own mortgage and what rate is it?
You might be able to reduce the mortgage at this high rate if you can extend your house mortgage at a lower rate.

The lendng to qualify for tax relief does not have to be on the property that is let so you should be able to do this.

surreybased

Great reply from getmore4less.

Only thing to consider is that property is usually a long term investment strategy. Over the last few years with the credit bubble it's easy to forget this. Can you hang onto the property for the long term? Pay down the capital so you're in a less vunerable position with interest rates and eventually you'll have an asset.

Gorgeous_George

What interest do you offset against rental income for tax purposes?

You need expert advice here but the interest on your BTL mortgage can be used and I believe some of the interest on your residential mortgage is allowable. I think it is £52,800 in your case.

GG

MarkyMarkD

Absolutely, GG. Interest on the entire £124,800 is offsettable for tax purposes.

If you've only been offsetting the interest on the mortgage on the let property, you've been doing it wrong and should go back and work out the figures correctly and ask HMRC for a refund of tax overpaid in the past couple of years.

rl290

VIGILANT22 wrote: »

You dont get better rates for a repayment mortgage!
Interest only is the most tax efficient way of arranging BTL as you are allowed to offset the mortgage interest payments against any tax you might be liable for on the rental income.... tax benefit only applies to the interest and not to any repayment of the capital which would be liable for tax......

I disagree. What you are saying is that it is worth paying £100 of interest because you get £20 of tax offset. This is clearly nonsense - you end up losing £80 overall.

IF you have debt in several places and need to chose where to put it, then a BTL is clearly better if the cost of the debt after the tax deduction is lower than, say, your residential mortgage rate. But it is not clear that this is the case in this scenario. In the absence of any other debt, then it is always better to have less debt, unless the return on your money (say, in a bank account) is more than the post tax interest rate of the BTL. That is not the case here.

Put simply, if you have a BTL mortgage rate of, say, 5%, multiply this by the marginal tax benefit. For a 20% tax payer, this is .8 x 5% = 4% actual interest rate. This should be compared with bank account rates and the interest rates on other debt.

R