Second Property

lockem

Hi all,

I apologise if this kind of question has already been asked..but here goes!

I am about to clear the mortgage on my current, first house, am aged 37 and would like to buy a second property.

I see this investment as a long-term 'pension alternative' and would not necessarily be looking for capital gains, but approaching it more from the angle that I would rent the property and have the rental income paying the mortgage, safe in the knowledge that my residual income would be more than enough to cover any costs, drop in rental income, rentless periods etc..and maybe if all went well, to overpay the mortgage repayments and clear the loan quicker.

I have many questions, but I guess my first one is..do I need a buy to let mortgage? or can I just go for a normal type mortgage and use the equity in property no 1 as security?

I'd also appreciate peoples view on whether I'm barking mad...to me, it seems like a very safe and good way to get a second property with little risk...I understand that there would be capital gains, tax on rental income etc, but the fact that I'm not looking for capital growth on the property or a huge return on the rent income, but using the rent income together with my spare residual income to get another property paid off quickly and a nest egg for retirement should mean a safe investment...and if the property appreciates and I am lucky with renting..then this would all be a bonus and help pay the mortgage off even quicker?...or am I missing something obvious?

Hope this makes sense and look forward to your feedback/comments.

Doozergirl

You will need a BTL mortgage. Having your borrowings against the BTL is more efficient tax wise; you're better off concentrating your efforts on reducing your own home mortgage first, if you have one.

You should read heavily on your responsibilities as a landlord and join an association. Please look after the house or you will have a depreciating asset and the quality of your tenants will also decline.

If you're going to do it, choose freehold. Flats are an administrative PITA, you can't predict expenditure and you're paying management fees constantly that just aren't associated to freehold. 2 bed terraces are flexible - can be let to all sorts of people - sharers, couples, young families etc so are less likely to experience voids and smaller properties also have better % yields than larger ones so it makes financial sense too.

Don't ask an agent to manage the property for you once a tenant is found. They charge a fortune and the fee is really only there for them to answer the phone to the tenant and collect the rent, take their cut and pass it on. Believe me when I tell you that they will then make you pay through the nose for every single repair as and when it arises. Do it yourself and perhaps invest in a Homeserve type agreement where your gas safety certificates are produced each year and important repairs can be carried out quickly under the policy. It will be cheaper than an agent's monthly fee.

lockem

Thanks Doozer, appreciate your comments and they all make perfect sense!
I understand that its effectively illegal to take a non BTL mortgage and then rent out, but I have a current mortgage which pretty much allows me to draw down on it against the value of my property - are there any pitfalls/legal issues if I were to borrow against my current property and use this to buy a second property outright..and then rent it out..and continue to repay against property no1. Haven't looked at the numbers, but I'm guessing a big negative to this approach would be that all the rental income would be taxable with no offset from the mortgage repayments. I'm just trying to think of different ways to avoid having to raise the deposit on a BTL mortgage.

Doozergirl

There is nothing to stop you buying the BTL outright but you will pay income tax on the full rent whilst paying additional interest on your own mortgage, whereas interest repayments on the BTL mortgage are tax deductable. If the equity is substantial on your own home, you draw-down on that for the deposit and set up a BTL mortgage.

There is a lot of maths to be done - you'll have to figure out the % you save on your resi vs a more expensive BTL mortgage and then compare that to the saving of the tax payable on the rent.

00ec25

Doozergirl wrote: »

There is nothing to stop you buying the BTL outright but you will pay income tax on the full rent whilst paying additional interest on your own mortgage, .

not so, plenty of posts on here and the cutting tax board (see posts here) clearly showing that you can secure a mortgage on your own home and use the money to fund a rental property purchase provided there is a clear doumentary trail showing that the loan was used to fund the BTL property

The tax offset is restricted to the value of the rental property only at the time of its purchase, so you cannot for example remortage the private residence at a later date to release more equity, you are capped at the original purchase price of the BTL property.

Cross subsidisation of the residential mortgage is not allowed - ie the amount claimed must be wholly and exclusively for the business purpose, ie the total interest payable on your mortgage will need to be split to isolate the rental property portion cost only

read the HMRC guidance and the section relating to dual purpose uinder the wholly and exclusively definition

G_M

00ec25 is correct. By using your residential mortgage to fund the new purchase you'll get a better interest rate. as warned, you must be able to show HMRC that the additional mortgage on your home was used to fund the investment property.

Buying the new property cash is not tax-efficient.

For further info on letting, read this post. Whether you use an agent or not, take care - in either case you need to understand your responsibilities.

SuzieSue

In reply to your question about whether you're barking mad - I could do exactly what you are doing - I have paid of my mortgage and am in my early 40s and I could easily buy a BTL. However, I don't like dealing with people and so being a landlord isn't for me. My friend has 2 BTLs and he has had problem tenants in the past.

So, while I don't think you're barking mad, it is not all plain sailing and I personally would find it too stressful and that is why I don't do it. I know I could get a much better return on my savings by buying a BTL, but I just don't want the hassle. If you don't mind dealing with problem tenants (and it doesn't matter how careful you are, you can still get them) and you're not a natural worrier then I would say go for it.

Thrugelmir

lockem wrote: »

..I understand that there would be capital gains, tax on rental income etc, but the fact that I'm not looking for capital growth on the property or a huge return on the rent income, but using the rent income together with my spare residual income to get another property paid off quickly and a nest egg for retirement should mean a safe investment...and if the property appreciates and I am lucky with renting..then this would all be a bonus and help pay the mortgage off even quicker?...or am I missing something obvious?

The capital balance on the BTL mortgage will be repaid out of after tax income. So whilst offsetting the interest on the BTL mortgage against the rental income is tax efficient. You'll need to generate a steadily increasing net after tax rental income stream to generate sufficient cash to meet the capital repayments on the mortgage.

So you'll need a good initial gross rental yield to make your plan work.

Also the net rental income will added to your other earnings. So you may find yourself paying 40% tax on part or all of this income as well. In this regard not a tax efficient investment.

Suggest you "crunch" the numbers on a spreadsheet.

Factor in some capital growth to make the investment more attractive.

Trollfever

I know I could get a much better return on my savings by buying a BTL

Several posters on this Board have indicated that they are getting negative returns on their BTL investments.

joerugby

You say you already own one property. What other investments do you have? Do you think it is wise to put all your eggs in the property basket for the next 20 years, or with that sort of time horizon might it be better to consider alternatives?

lockem

Thanks for everyones comments - some good feedback. Are there any mortgages or ways of getting a BTL without having to stump up a large(ish) deposit?