BTL - interest only or repayment

yorica

Hi

Any advice is gratefully received.

I will be renting out my current house and re-mortgaging it to fund the purchase of a new home.

My current home is worth £200k and so I will get a BTL mortgage of £140k to use for the next home which is worth £270k. The mortgage on my new home will be £200k meaning that I then apply for a residential mortgage of £130k.

BTW - I currently have an outstanding £70k to pay on my current home.

I would like to hear your views about going interest only on the BTL for the first 2 years as I will probably re-mortgage again once the initial deal ends. However, the BTL will cost circa £1k and so I'm not looking forward to paying this every time I re-mortgage. In fact the residentia mortgage is also costing me £1k (ouch!).

The rental income will be £900, the BTL will cost £748 pm for the 1st 2 years (based on a repayment mortgage) and the residential mortgage will be £931 pm (based on a repayment mortgage) for the 1st 2 years leaving me to pay £779 every month from my wages - I'm currently on £2600 pm (net). BTW - both mortgages are 2 year trackers.

There are also other tax implications which I have yet to fully understand.

The BTL mortgage offer I have been given is based on a repayment basis but should I consider the interest only route initially and look around for a suitable investment vehicle?

Thanks again.

saverbuyer

Very tight. Are you on a low base rate tracker?

holly_hobby

The first thing I would say tax wise is that you are only allowed to offset mortgage interest off rental income for tax purposes. So obviously if you elect to go C&I, there will be chunk of your monthly mge repayment that is not tax deductable i.e the capital repayment part.

Rental income needs to be 125% of mge repayment (use 6% as a ballpark fig for general calcs).

Repayment vehicle wise for I/O - evidence may be reqd by the lender. (all typical investment vehicles are usually acceptable)

There are currently some fee free BTL remortgage deals which you may qualify for (but you will need a lender who accepts first time landlords).

These same fee free deals may be in existence in 2 yrs when you say you will wish to move your BTL mge again.

Advise HMRC, within 2 yrs of moving, of the change to your main residence for CGT purposes. (if you sell prop no 1 within 3 yrs of moving out, you will avoid cgt altogether, otherwise there may be CGT liability (following the application of primary residence relief, annual cgt and lettings allowance).

I am a little confused however on some of your figs ...

You say your new prop is worth 270k, but "The mortgage on my new home will be £200k meaning that I then apply for a residential mortgage of £130k".

So I assume you are buying it at less than market value, i.e from a family member ? (i.e market value you quote of 270k - you say the mge (but I suspect you mean purchase price) is 200k, and will apply for a res mge of 130k. i.e 200k pch price less
70k capital released from prop no 1).

If the actual market value (MV) is 270k, but you are buying at 200k due to a linked family gifted deposit - you may still be liable for stamp duty (SDLT) at 3% which is applicable to 250k+ purchases - so this may need to be factored into your costings budget. If this is the case double check with HMRC or your Solicitor.

If however the propery is just being sold by an unconnected seller at 200k (despite its MV being circa 270K), than SDLT will be charged on the actual pch price of 200k, which is 1%.

Just thought it worth mentioning this due to the noted difference in MV to Sale/Pch price.

Hope this helps

Holly

jimjames

As mentioned by Holly the BTL as repayment will not all be allowable against tax, only the interest element so there is a case for just having the BTL as interest only and paying separately into savings vehicle to be more tax efficient.

Market Harborough BS are offering BTL at 3.85% at the moment.

jamesd

BTL and interest only is normal because of the tax treatment. This deductibility of actual interest paid from rent applies up to the full value of the BTL property at the time it was transferred to the rental business. It can include interest paid on a normal residential mortgage, not just BTL mortgages. Residential mortgage are usually cheaper than BTL. This means in part that you should consider whether a higher mortgage on your own residence to reduce the amount borrowed on the BTL loan makes sense.

Any deposit used for the BTL property is part of the transfer of value into the BTL business. Any mortgage capital taken out is withdrawing some of that capital from the business. It's worth considering how much capital you want to put into the BTL business and whether you'd be best off by having both the BTL mortgage and enough of your residential mortgage to take it to 100% of the property value as deductible from rental income.

You seem to have the optimal mortgage treatment reversed, increasing BTL borrowing to reduce residential borrowing when you should be doing the opposite.

I think your plan is:

BTL on the 200k BTL property to raise £140k. You have £130k equity already so this releases £70k that you intend to take out of the BTL business. I'm assuming no tax on that because I'm assuming that the value of the BTL property when you transferred it to the BTL business was £200k, if it was less than £200k when you took it out you might have some tax to pay. If the value of the property was at least £140k when it was transferred into the letting business then the interest on this BTL loan is deductible from your renatl income, if it was less then only the mortgage up to the lower value is deductible.

You then intend to use the £70k to pay part of the deposit on the new residential property and top that up with a £130,000 residential mortgage at 48% LTV.

That LTV seems very low when you're also getting a BTL loan. Surly you can find a residential mortgage at say 75% LTV that would let you borrow £202,500 on the new residential property more cheaply than the BTL rate? That would eliminate £72,500 of the required BTL loan value, reducing that from £140,000 to £67,500.

Assuming that the value of the BTL property was £200,000 when transferred to the BTL business you'd then deduct from rental income the interest on the £67,500 BTL mortgage and £132,500 of the interest part of the residential mortgage.

The reduced BTL loan will make it easy for the BTL rental income to cover the BTL mortgage payment with whatever margin is required.

This combination should get you the lowest possible overall mortgage rate for the combined deal, assuming only that you can find a residential deal cheaper than the BTL deal, which is usually easy enough to do.

yorica

Thanks HH & JamesD. I just want to clarify.

My current home is worth £200k - I have a £70k mortgage still to pay on this property. I want to rent out this property and re-mortgage by converting the £70k to a BTL and release a further £70k to fund the purchase of a new home where I will be living. This is a total BTL mortgage of £140k (LTV 70%).

I will then be purchasing a £270k house with £70k from the BTL equity release and £200k residential mortgage (LTV 74%).

holly_hobby

yorica wrote: »

I just want to clarify that ... I will then be purchasing a £270k house with £70k from the BTL equity release and £200k residential mortgage (LTV 74%).

Ah .. ok that clears things ... !!

Then unfortunately SDLT will be 3% on the 270k ... :eek:

Wish you good luck with both you apps & future tenants

Holly

yorica

Hi guys

I would still like to hear from people about whether to go for a repayment or interest only mortgage(s) on the BTL.

Thanks

Leon_W

Most of the business I do with BTL is on an interest only basis for the reasons that holly and james state above (very good posts btw).

One other thing I would mention is that if you arrange a repayment mortgage it can be very difficult to get a lender to switch to interest only if you change your mind. Your figures are tight and if you get a void can you really subsidise the mortgage to that amount every month ?


Personally I would go interest only, put the extra money aside, and if I so desired, repay a lump sum when the Early Repayment Charges finished or, if the mortgage has this feature, use any overpayment facility.

This keeps your options as open as possible.

jamesd

The most efficient way would be something like:

1. Extract capital from the BTL businesss to fund the residential one up to £200,000. In your books, this doesn't change the loans taken.
2. Since the value of the BTL was £200,000 when it was transferred to the letting business you can deduct interest on £200,000 of loans from rental income.
3. Since the BTL loan will probably be at a higher interest rate, use repayments and extra payments on the BTL and if possible interest only on the residential.
4. But keep the BTL borrowing the same, just changing the mixture of BTL mortgage and residential mortgage included in the £200,000 outstanding.
5. Objective to eliminate the BTL loan and have just a residential loan at lower cost, but keep £200,000 of BTL debt deducting interest from income.

Leon W. is right about interest only and switching to it from repayment, better to start out as interest only on all loans where you can qualify and make extra payments if you want repayment basis. That gives you more flexibility.

If you will be accumulating capital you might consider whether an offset mortgage for the residential loan would make sense. That could let you have interest only BTL with no extra payments and accumulate money in the residential mortgage offset account that saves you interest but remains available to reduce or clear the BTL mortgage later.

JimmyTheWig

Generally people would go for a interest only mortgage on the BTL as that will maximise the amount of rent you can offset before paying tax.

HOWEVER, I believe that you can only offset the interest of a loan used to purchase the let out property. Rather than offsetting the interest of a loan secured on the let out property.
So, for example, you could remortgage your existing residential property (probably on more favourable terms than a BTL mortgage) and use that money to buy a place to rent out. You could offset the interest on that loan against rent received.
But if you remortgage your existing BTL property in order to buy a new residential property you can't offset the interest on that loan against rent received as that loan wasn't used to buy the BTL property.

That's how I understand it. I may be wrong.