Buy To Let & 2nd mortgage

Craig_Grant

Morning all

I'm a long time reader and first time poster.

My wife and I are currently in the process of trying to pay our existing mortage off within the next 5 years. With the plan of owning the place we currently live in and then moving on to a family home as we start our family.

My idea, and please advise me if this sounds ill thought out, is to pay this place off in full and then take out around a £40k buy to let mortgage on it (roughly 30% of the house value) to use as a deposit for the new place.
If we do this, how would it affect what we can borrow for the new mortgage?

Would we just be better off paying off the current mortgage in full and then living in the house for another year or so as we save up the required deposit for a new house?

The one thing we both feel strongly about is that we want to own the house we currently call home.

Thanks

Craig

Gorgeous_George

It shouldn't affect it at all. Providing the rent covers 125% of the mortgage (depending on the lender) then the BTL should stand up on its own and the new residential mortgage will be assessed on your salries.

You might want to check up on the rules regarding the offsetting of mortgage interest against the BTL income for tax purposes. It would seem to me that some of the interest on your residential mortggage should be allowable (up to the value of your current home at time of first let) but I am less sure about this today than I was last week. Seek professional advice and read HMRC's guidance to form your own opinion.

Don't think that being a landlord is an easy ride. Make sure that your business plan considers all the risks fully. It may not be worth the stress - I wouldn't bother if the yield was much less than 10% (yield = annual rent/property value).

And good luck.

GG

Craig_Grant

Thanks for the advice GG. Its a few years away so I have plenty of time to research it fully.

I suppose the alternative would be to sell the house and make the money work for us in other ways? If that proves to be the case I have 5 years to try and make the wife realise that she can't let her emotions get in the way of financial decisions. Easier said than done !

JA1000

Why wait 5 years? Do it now?

Either raise the capital and give a while then get a consent to let or convert to a buy to let now by raising the £35k capital rather than pay it off then go forth and multiply!

Craig_Grant

JA1000 - we don't see it so much as a business venture, more a security as a good start for a young family. Which is why GGs post has given me food for thought.

JA1000

I was thinking more from the side of house prices. You are not selling to move on so your house value is irrelevant. However, you are looking to buy, you would be hard pushed to find anyone on here who didn't think house prices will proportionately rise over the next 5 years.

Now is probably the cheapest time for you to do it. I agree it's not a business venture but it is about maximising your capital and the current market.

At the end of the day it's your call, if I was in your position, I wouldn't be hanging about.

Craig_Grant

You make a good point, unfortunately, because it's now making me head hurt ...

The real issue is that our current mortgage is currently around £116k and rent is unlikely to cover the mortgage if the interest rate rises by a few %.

With plans to start a family within the next year I think it is just too risky at the moment for us. I'll give it some thought though.

JA1000

You are looking to pay £20k off your mortgage each year for the next 5 years, why not put this into savings, effectively once it's in the mortgage it will be difficult to get back. If your plans change at any time you can use the savings to over pay and stay put. This way you'll have a deposit in 2 years or less if you try harder.

Craig_Grant

It's something we'll need to give some serious thought to. Up until today we'd been dead said on paying off one house to rent it out and then buy a bigger one.

By trade I work in Finance and am wired to be pretty risk adverse. The idea of having a big residential mortgage and a good sized BTL mortgage frightens me a little if i'm honest.

I can see the benefits of your suggestion but it just appears too risky to me. I don't really want to bring a young family up under those conditions.

JA1000

I understand what your saying, my last post was trying to give you the option of both by saving. Some people have struggled to get money back out after over paying and remortgaging on one property and then BTL on the other. Unfortunately in this market - Deposits talk!!!

Thrugelmir

This should help.

It is also possible to offset interest if you decide to re-mortgage a property.

The important point to note here is that you can only offset the interest on the outstanding amount of the mortgage.

You cannot re-mortgage a property for a greater amount and offset the interest, unless the additional amount you are re-mortgaging is to be used for an investment property.

If you remortgage and use the additional capital sum to buy another property, the additional interest can be treated as an expense to offset against income from the new property.

If you remortgage and spend the proceeds on personal living expenses, you cannot offset the cost of the loan against a future CGT liability on the sale of the property. There are strict rules as to what expenses can be offset against CGT. The interest cost can only be offset against revenue.

In essence what are you are proposing doesn't work.

You need to leave £40k of your existing mortgage outstanding rather than pay it off.

As the purpose of remortgaging, if you use your scenario is for personal rather than business use. So the interest would not be offsetable against tax.