Mortgage and rental offset

scottish_lassy

Hi guys

my DD and partner have a house with a very small mortgage £15k (due to family help with deposit etc a few yrs ago). Now they want to buy a new house and in the current market have decided to rent their current house rather than sell. My query is about financing their new purchase - should they increase the mortgage on their current house (using that towards deposit) and then they can offset rental income against the mortgage repayment or is there some way they can take out a large mortgage for their new house and still offset costs for the rental property.

I hope i have made that understandable!! ie they do not want to make a profit on their rental, just a property that 'washes its face' until the market improves.

SL

Senior_Paper_Monitor

Basic rule is that you can offset mortage interest (not capital) costs against rental income on that property for tax purposes.

In fact, if you raise a loan on another asset, such as your family home specifically for the purpose of funding a rental property it can also allowable for offset.

It would appear to me almost certain that their best route would be to raise capital against the buy to let to the extent that the rental will allow (despite the higher interest fees and charges applicable) as no component of the new purchase/mortgage would be allowed for offset.

Additionally the greater deposit (reduced LTV) will help achieve a much better rate on the new property.

antrobus

The basic rule is that if you borrow money in order to finance the purchase of a house which you then rent out, then the interest payable is an allowable expense against any rental income. In the circumstances outlined above however, DD and partner are going to borrow money in order to finance the purchase of a house which they are then going to live in, so no, they will not be able to offset that interest against the rental income arising on another property. And it actually doesn't matter which property has been provided as security for the loan. The interest payable on the existing very small mortgage of £15k would however be an allowable expense, as clearly that loan was indeed used to buy the house that is being rented out.

Basically there are no tax reasons why DD and partner should pick one option over another, they should just look at which is the cheaper option in terms of interest rates etc.

getmore4less

It should be possible to structure lending upto the value of the house when first let to get interest offset.

HMRC have examples, but I can no longer find the one that show this.

Senior_Paper_Monitor

I'll have to diagree with Mr Antrobus on this one - I believe that once the borrowing is on the buy to let it will be allowable (if not we have many client's - who have been advsied by us and their own accountants - who went through a similar process, that are going to be very surprised!).

As ever - take professional advice (anything on here can only be opinion).