Interest only mortgage to save and buy house no2

biggsy_2

I want to get an interest only mortgage on my one bedroom in london flat (mortgage 146k) - so I can save a desposit in order to move out of london, and buy another flat which I will live in and then rent out the flat in london. The idea being is to keep the london flat for ever, so I have an investment for when I retire. Is this a good idea? Should I set up a company to do it, what are the tax implications.
The london flat could probably bring in around £800 a month rent, and I would plan to let it out in around 2 years time
Any advice much appreciated

lisyloo

Is this a good idea?

Personally I think it's a rotten time to invest in property.

As for retirement savings - do you have any other savings for retirement? e.g. pension.

Personally I do not like the idea of relying on property for your retirement.
It's illiquid - what happens if it takes a while to sell?
It's all your eggs in one basket - what happens if it turns out to be on a toxic waste dump and becomes worthless. With a pension spread out amongst lots of shares then you are spreading your risk.
You loose all tax free benefits assocaited with pensions.

On top of a pension then it's not a bad idea, but now is not really a good time as there is a risk of price falls in the property market.

what are the tax implications

You will have to pay income tax on any profits (after mortgaeg interest and repairs and other expenses).
You will have to pay Capital Gains Tax on any profits you make on the house when you sell.

The london flat could probably bring in around £800 a month rent

A mortgage of £146K at 6.5% will be £790 per month, plus you need to cater for repairs and costs e.g. agents fees.

You need to do some sums to work out whether this is worthwhile.
On the face of it, it doesn't look great to me when you take into account the costs you will have and the work you will have to do (and I wasn't allowing for any empty periods).

yonk

Conservative assumptions to make:

1. It will be empty for two months a year - even if it isn't, an agent charges a hefty sum when they relet the property.

2. The rent should be 1.2 to 1.5 x the mortgage payments to allow for costs, maintenance etc.

3. Agent's fees - quite high in London.

To gauge the return on the investment, divide the rent by the capital value and multiply by 100, that gives you the yield - if it's less than 5% that's fairly poor for a property investment. People are including capital growth in their projections but I would make sure that it stands as an investment on income alone, otherwise, you are subsidising it.