buying a new property and rening out my current one - dilemma!

jimmyboy420

Hi all,

I have often browsed these forums and they have a very good rep from https://www.thedvdforums.com but this is the first time I have needed to post, so here I am!

I love money saving so hope to become a regular contributor.

I am starting a new job and relocating, all at the same time. I plan to rent my current place out, and buy a new poperty in a new area.

Now the financial details:
Mortgage (repayment) on the current place is £505 per month. I expect to recieve £550 per month rental income, but I will have to pay agency fees etc from this, so in the short term I will be making a loss of around £80 per month but this is only cos I'm paying off capital from my mortgage. The actual outstanding balance on my mortgage is around £76K and if I made it interest only, I would make a small profit on it of around £50 per month. So, theoretically, the old place will cover itself. It is a purpose built one bed flat, very low maintenance so I don't expect many other costs. It is worth about £120K

I have about £10K in savings to put cover the costs of a new place. I will be earning £42K per year (plus as yet unknown bonus) and want to try and buy a place around £175K. I recognise this is a bit of a stretch but in my career I would be earning another £5,000 per year in a years time no problems and in two years I should be qualified and on £60K minimum (I am a trainee actuary). I am also looking at getting my brother in as a lodger and this will help with on going costs of the new place.

I have no dependants or other debts.

So I need to get a 'big' mortgage whilst having just started at a new company, and having a new rental place on the go.

Any advice?

I had one thought which was to raise as much cash as I can from my current place (the place I am renting), as the interest I pay on it will be tax efficient and then use this towards a mortgage elsewhere. The problem with this would be that in order to get that extra equity out, I think I will have to pay a higher interest rate with this being an interest only property. Is this right? Does any of this make sense? Is it possible to get these sorts of multiples when there isn't much deposit?
Thanks for your time.

James :beer:

jimmyboy420

OK so I've just been reading round the forum and have found that for the interest to be tax deductible the mortgage must be for the purpose of buy to let.

I have contacted my lender and they are happy to allow me to let the property on my current mortgage terms. If I raise any additional money against this property it will be an 'additional' loan on the property via the same lender. So does this mean I am OK, or do I actually have to get a mortgage with different Ts & Cs to get the tax benefit?

moneysavinmonkey

Hi James,

Don't know much about this kind of thing but sure someone who does will be along shortly....

you should bear in mind when calculating if rent will cover the mortgage that;
you will probably have some voids
you will have to inform your mortgage lender + may be switched to a higher rate
you will need to factor in a repairs/redecoration budget
you will have to pay tax on your rental income

why do you want to hang onto your old flat?? particularly if you switch to interest only you are effectively investing/gambling on further house price rises, as an actuary you probaby know the risk far better than I!

Also if you hold onto your new flat that only leaves you with 10k savings... by the time stamp duty + fees + moving costs are paid you aren't going to have much of a deposit....

sorry for negative view, good luck with the move + new job!

silvercar

you need to first consider if your plan would work then the tax implications.

normal mortgage critera for BTL is max 85% loan to value and the rental income to exceed the interest only mortgage payments by 25-30%. Your current lender will allow you to let the property, but will they let you increase the loan? questionable I would say.

Lets assume your current place pays for itself as a BTL.

Now look at the new place, deposit £10,000 so you'll need a mortgage of £165,000. Should be possible as trainee actuary to get a mortgage 4 times your income. See a whole of market broker, they will know who will give you a high amount.

I would suggest that you need to put money aside for solicitor's, stamp duty and surveys. Also you should have at least some savings in case of repairs to either house.

back to tax. you can claim tax relief on any mortgage interest upto the value of the property when you started letting it. The mortgage doesn't even need to be secured on the let property, providing its purpose is to fund the letting "business". People take out loans on their residential home to fund BTLs and get tax relief, if you had an unsecured loan it could still attract tax relief, if its purpose was your BTL.

jimmyboy420

The reason I am wanting to rent it is it is in a good renters area (near to town centre, etc) but not a very attractive area so prices aren't great compared to rental income.

I think I can make it work, at least for 12 months, and then see where I stand. The main concerns I have are making sure my ability to borrow for a new place is not impeded. The tax implications and filling out a tax return are also a bit daunting but I don't think it will be as bad as I think it is when it comes to it.

moneysavinmonkey

jamesking wrote:

The reason I am wanting to rent it is it is in a good renters area (near to town centre, etc) but not a very attractive area so prices aren't great compared to rental income.

I think I can make it work, at least for 12 months, and then see where I stand. The main concerns I have are making sure my ability to borrow for a new place is not impeded. The tax implications and filling out a tax return are also a bit daunting but I don't think it will be as bad as I think it is when it comes to it.

Don't quite get your logic of not selling - you said yourself the rental income isn't going to cover the mortgage repayments!

I'm certain that the best deals for mortgages require at least 10-15% deposits so holding onto your old house isdefinately going to limit the mortgage deals available to you... I suggest you post on the mortgages board as they should be able to help you better.

jimmyboy420

moneysavinmonkey wrote:

Don't quite get your logic of not selling - you said yourself the rental income isn't going to cover the mortgage repayments!

I'm certain that the best deals for mortgages require at least 10-15% deposits so holding onto your old house isdefinately going to limit the mortgage deals available to you... I suggest you post on the mortgages board as they should be able to help you better.

OK. Thanks, I will do that.

Sorry if I didn't mate it clearer earlier - if I were to turn my mortgage to interest only I'd be making a profit on it.