Buy to Let with Equity from Home

TepidWater

Advice would be welcomed on a conumdrum I'm debating.

I earn circa £50k pa (Net income of £2400 pcm - i.e. after everything is taken out (including CSA). My job is relatively secure (education).

Partner earns approx £27k pa (Net income of £1600 pcm). Partner's job is fairly secure (successful and growing service business).

We're getting married shortly and she is in the early stages of pregnancy. If everything goes to plan, she will be cutting her working week down to 4 days after the baby is born. This will mean a drop in real income of about £350 pcm.

Fortunately, we have no credit cards, overdrafts or loans. Unfortunately, we don't have a great deal of savings either (approx £8k). Both of us are lucky enough to benefit from very good (at least at the moment anyway!) pension schemes.

We "own" two houses. Residential in both our names and the rental property in just her name.

The one we live in is worth a minimum of £220k and we have a mortgage for £167k (£760 pcm) on it.

We rent out the other house worth approx £110k with a £78k (£360 pcm) mortgage on it.

Both mortgages are interest only at the moment (get-out penalty clauses expire in November 2006).

We're currently thinking about buying a house selling at £119k (purchase price about £112k) as a buy-to-let pension-type project. To do this, we intend remortgaging our residential house to release approx £30k and then taking out a buy-to-let mortgage for the remaining amount. We'd aim to put about £25k down as a deposit/stamp duy/sols fees and use the remaining £5k to tidy the place up (very little to do).

After November, we aim to create three fixed interest mortgage payment schedules.

The house we are thnking about buying would rent fairly easily for approx £500 pcm. It is our intention to rent this house out (and the one we are currently renting) for about 10 years then hope to sell. With any luck, we'd be hoping to pay off a substantial amount of our residential mortgage with the proceeds.

Now, I have a very basic understanding of capital gains tax although I'd welcome further guidance. The income tax liability would be very small as the rental income would just about cover the mortgage repayments.

Any help would be much appreciated. Thanks in advance.

ginger_nuts

First off I am no expert .

Has property 2 ever been your partners main residence ,if it has then she shouldn't have to pay CGT for three years after she moved out .
If it hasn't then GCT would be payable but after 3 years she would start to get tapered relief .At 3 years she would be taxed on 95% profits ,4 years 90 % 5 years 85 % decreasing every year for 10 years .At 10 years she would be taxed on 60% off the profits .At the moment you are allowed £8800 per person tax free .It would be best to put both property 2 &3 in joint names to take advantage off the £8800 tax free .Property 3 will have the same tax liabilities as property 2 . The thing about CGT is ,any government can change the tax rate and allowances wheather it be now or 5,10 years down the line .If any government wanted to discourage BTL all they would have to do is increase the CGT .
Do you need to borrow £30,000 for a deposit . You wont have stamp duty on property 3 ,do you need to spend £5000 tidying the place up if you are renting it out .
As I said I am no expert .

TepidWater

Thanks Ginger. I wasn't aware of the tapered relief element.

My partner lived at the house for 11 years before we bought our current house together.

I totally agree with you in that £5k is not entirely necessary. From our first viewing, the property would benefit from new windows, a few weekends garden work and a bit of powder and paint inside.

Obviously, we'll be getting a full survey so if anything major is flagged, we'll be walking away!

Our current house, the house we're currently renting out and the house we're hoping to buy are all located within a one mile radius. We know the area extremely well. House prices around here (like everywhere else I suppose) are fairly static although they are still following a slowly increasing trend.

You mention that we won't incur stamp duty. Is that a BTL issue?

Anyway, your advice is much appreciated.

ginger_nuts

TepidWater wrote:

You mention that we won't incur stamp duty. Is that a BTL issue

Stamp duty is not paid unless you buy at over £125,000,you where looking at houses costing £112,000 possibly £119,000 .

as for the second house ,your partner lived in it for 11 years .
She will not pay CGT until 3 years after she has moved out .
If she sells during that 3 years she will pay no CGT ,otherwise as tapered relief as above . I think you/she may get better tax relief on this property (letting relief ,not sure how this works ) because this was not a BTL but a "let to buy ".
Where she rented out her main residence .I have heard figures off £40,000 lettting relief but I dont no for sure .
Hopefully someone on here will be able to give you more details on letting relief .

tomstickland

I think your financial plans are property heavy and I'd recommened looking at building up cash savings and investing in the stock market.

PoorDave

There is no stamp duty payable for a purchase price below £125k.

Also, if you're intent on buying this 3rd place to rent, don't spend £5k of your money if it won't increase the rental value, unless you're sure it's easier this way e.g. replacing rotten wooden window frames with uPVC now while there's no tenant to deal with might be a good idea. But remember it's a business, so don't spend money you don't need to just because you can.

roswell

I would suggest not using equity from your main residance after all you have to live there .....

If anything get the equity from the current BTL you have.

I think you should be looking at saving or over paying your current mortgage (main mortgage) before going further into property.

TepidWater

Thanks all.

I have no real expreience of investing in the stock market but I'm certainly open to suggestions. I've started a cash ISA and I'm looking to get about £2k pa in this.

Good news on the stamp duty issue. I'd factored in a couple of grand for this.

The windows are aluminium secondary glazing. I've had some bad experiences with these on a previous property so looking at cheap uPVC as replacements prior to tenancy.

TepidWater

Roswell. I really appreciate your comments here.

I'm not hell bent on buying the third property. When we move to new mortgages next month, another possibility we've explored is to sell the rental property, use the equity to clear some of the mortgage on the residential mortgage and increase to a high contribution repayment mortgage.

I'd genuinely welcome comments.

ginger_nuts

TepidWater wrote:

Roswell. I really appreciate your comments here.

I'm not hell bent on buying the third property. When we move to new mortgages next month, another possibility we've explored is to sell the rental property, use the equity to clear some of the mortgage on the residential mortgage and increase to a high contribution repayment mortgage.

I'd genuinely welcome comments.

if you think you may sell property 2 then make sure you can make overpayments on your main mortgage .Often you will only be allowed to overpay less than 10% per year .If you think you will sell property 2 it may be worth waiting until this is done before you remortgage your home .

Richard_III_2

This is only a comment, as you requested.

There used to be only 2 things certain in life: death and taxes.
At the current point in the property cycle (for thats what it is), there are 2 other certainties: interest rates are going up + property prices will be coming down (just do a little research, but not from vested interests such as Estate Agents and Mortgage Brokers)
If you're happy with the knowledge that you will be heavily geared (and that works both when the market goes up, and next down) then fine.