Level of Mortgage on a Buy to Let

Caroline_a

Quick question for those more knowledgeable than me! When purchasing a buy to let is it better to have the smallest mortage possible (or no mortgage) or the largest (so as to take advantage of tax relief)?

scottishblondie

My gut instinct would be to have the smallest mortgage, as the interest on a mortgage may be set against the income tax but you are still wasting money on paying the interest itself. I guess someone more knowledgable will be along shortly to give a better answer. You probably need to work out your figures.

adg1

You'll do well to get any type of decent rate on a buy to let investment currently (50% deposits are often bandied about as the risk is far higher to the lender).

The ultimate - no mortgage. All the rent goes to you.

With a mortgage - you pay mortgage, interest, fees t oget the mortgage etc.

JQ.

The real theory is actually to get the largest mortgage possible, to reduce the income tax. Then use any remaining equity to invest in another BTL and keep going as values rise, continually re-mortgaging and re-investing the capital in further properties. Ultimately if you're not making a good enough return to cover a 75% mortgage and give you some reasonable return on the equity then you've invested in the wrong property.

This is ultimately what caused most peoples downfall as the falls in value exceeded the agreed LTV and the banks took possession. There were also lots of people buying properties where the rent never actually covered the mortgage and they were just relying on capital appreciation - madness.

The decision of how much to mortgage must be a personal one as everyone's personal circumstances are different - so do whatever is best for you. Work out all the numbers on a spreadsheet and see what's best.

Caroline_a

Thanks everyone - I will be inheriting some money soon, so am thinking how to invest it. Everything still in planning stage still though!

myhouse_2

For tax reasons, the biggest mortgage. Ideally you would like to have your personal house with a very low or no mortgage and the BTL with a high mortgage. This is because you can offset the income from the BTL against your expenditure on it (including mortgage interest).

Caroline_a

Hmmm confused now. My house has no mortgage and I would be able to afford to buy another to rent outright.

neas

buy two

JQ.

You can borrow against your own house and offset that interest against your tax. The cost of such a mortgage would be considerably cheaper than a buy to let.

Caroline_a

JQ. wrote: »

You can borrow against your own house and offset that interest against your tax. The cost of such a mortgage would be considerably cheaper than a buy to let.

Thanks for your answers. It's a little more complicated that that though, my house is held in trust for my lifetime then goes to my children, so although I'm mortgage-free, I can't borrow against it.

Raggs_2

Biggest mortgage possible, assuming your return rate on the value of the house, is higher than your mortgage rate.

10% return on 200k house = 20k a year
5% mortgage on 150k = 7.5k a year

12.5k clean profit, on 50k of your personal investment. 25% interest rate basically.

10% return on 200k house = 20k a year
5% mortgage on 100k mortgage = 5k a year

15k profit on 100k investment = 15% interest rate.

Better interest rate on the smallest investment. As long as return is higher than mortgage, as small an investment as possible is best.