buy to let mortgage

maccyd_3

Hi,

I've got a flat that I'm now renting out. I bought it in 2007 for £150,000 and have a mortgage balance of £125,000 left with the nationwide (capital and interest repayment, discount period well and truly expired about three years ago). The interest is going up on this mortgage because we are now renting this flat out so I'm thinking that now would be a good time to switch mortgage. The flat is probably worth about £140,000 now.

Do I need get a mortgage that is specifically for buy to let purposes? I can't seem to find anywhere that will do mortgages for anything more than 75% the value of the property. Is that standard now? Does that then mean that I am stuck with Nationwide unless I can put some more capital in?

Any advice would be greatly appreciated. Its been a while since I had to shop for a mortgage and times have indeed changed since 2007.

Cheers

GMS

There is a lender for BTL at 85% LTV. It is a broker only product.

What rate will you be paying on the mortgage you have when it rises?

holly_hobby

Yes you will need to switch to a traditional Buy To Let mortgage.

As GMS states max LTV is 85%, the lender is actually Kensington Mges who are intermediary only access (so you must source this via a broker).

Basic details ...

Rental income 120% of mge
Minimum earned income of main applicant 30k @ 85% LTV
Repayment methods - Capital and Interest (C&I) or Interest Only permissible (I/O being the most tax efficient method)

Product wise @ 85%

Currently offer a fixed rate of 5.99% until 31.8.2013,
And a pretty hefty fee of 2.5% of mortgage advance

Bearing in mind the above, you may want to do a bit of number crunching and compare the figs against your current consent to let rate with NWide, and decide if its actually worth moving the mge at this point (or wait until you have a lower LTV to open up the market a little more).

Hope this helps

Holly

Thrugelmir

holly_hobby wrote: »

(I/O being the most tax efficient method)

A common myth.

There are certain situations where interest only can be advantageous.

However if the property does not make an after tax profit. Then there will never be sufficient profit to repay the capital owed.

Relying on capital growth (increase in prices) to provide a return is an era that has passed.

A fact that is worth remembering is that there were only 30,000 BTL mortgages outstanding at the beginning of 2000. The tax laws haven't changed. However the Bradford and Bingley that instigated the fad and boom are no longer.

getmore4less

The interest is going up on this mortgage

what rate?

holly_hobby

Thrugelmir wrote: »

A common myth.

There are certain situations where interest only can be advantageous.

However if the property does not make an after tax profit. Then there will never be sufficient profit to repay the capital owed.

.

Tax efficiency re- only the interest element of mge repayment being a permitted deduction against gross rental income, as discussed as part of permitted repayment methods by the potential lender.

The redemption/reduction in borrowing of the mge itself, is a sep issue to advising the OP the most tax efficient repayment method. (although as a point for your ref the OP appears to be an accidental landlord and their old res mge, now transferred to CTL, currently remains C&I based)

Holly

Thrugelmir

holly_hobby wrote: »

Tax efficiency re- only the interest element of mge repayment being a permitted deduction against gross rental income, as discussed as part of permitted repayment methods by the potential lender.

The redemption/reduction in borrowing of the mge itself, is a sep issue to advising the OP the most tax efficient repayment method.

On the basis that these are separate issues.

So on the premise that letting a property makes no profit. What is the most tax efficient method of repaying the capital sum?

holly_hobby

Lets be clear - and not muddy the waters ... mortgage interest payments may be deducted in full from rental income for tax purposes - and therefore reduce the amount of rental income liable to tax. Whereas if the mge is held under a C&I basis, any capital payments may not be offset under current HMRC rules - thereby increasing the amount of rental income exposed to tax liability.

Most BTL landlords intend to sell the property at some point - those who don't obviously have to consider how they will eventually redeem the mge.

Whilst those who do intend to sell, and whom make a profit from their BTL invesment, should ideally use the gains to reduce their own residential mge (subject of course to annual penalty free allowance), as their res mge will enjoy no tax breaks (other than CGT of course) since the sad aboliton of MIRAS.

To answer you question, IMHO the most tax efficient ways to fund repayment of a BTL I/O mge for the amatuer landlord (notwithstanding ATR & consideration of EIS/VCTs), is by the use of tax efficient investments, such as ISAs and pension investment - funded partly or wholly by TFLS @ 25% on retirement (subject to lifetime regs). The investment into such vehicles funded (partly or wholly) by the element that would have been repaid under captial element of a C&I mge.

Do you have any alternative suggestions for tax efficient repayment vehicles, that you consider would be suitable for the amatuer landlord?

H

Thrugelmir

holly_hobby wrote: »

Lets be clear - and not muddy the waters ... mortgage interest payments may be deducted in full from rental income for tax purposes - and therefore reduce the amount of rental income liable to tax. Whereas if the mge is held under a C&I basis, any capital payments may not be offset under current HMRC rules - thereby increasing the amount of rental income exposed to tax liability.

Most BTL landlords intend to sell the property at some point - those who don't obviously have to consider how they will eventually redeem the mge.

Whilst those who do intend to sell, and whom make a profit from their BTL invesment, should ideally use the gains to reduce their own residential mge (subject of course to annual penalty free allowance), as their res mge will enjoy no tax breaks (other than CGT of course) since the sad aboliton of MIRAS.

To answer you question, IMHO the most tax efficient ways to fund repayment of a BTL I/O mge for the amatuer landlord (notwithstanding ATR & consideration of EIS/VCTs), is by the use of tax efficient investments, such as ISAs and pension investment - funded partly or wholly by TFLS @ 25% on retirement (subject to lifetime regs). The investment into such vehicles funded (partly or wholly) by the element that would have been repaid under captial element of a C&I mge.

Do you have any alternative suggestions for tax efficient repayment vehicles, that you consider would be suitable for the amatuer landlord?

H

The answer I was actually looking for was.

No after tax profit = No cash generated.

Therefore no cash to repay capital debt with.

A basic flaw in any business plan if no profit is projected. Tax efficiency is a secondary issue.

Interest is an allowable tax deduction in any business so no muddy water. Nothing unique to BTL.

holly_hobby

No you asked for tax efficient repayment methods for I/O mge - and I asked you for your recommendations to the same.

Where has all the "there is no profit" are we talking about the OP or just a Hypo therory - as the OP as far as I have read hasn't actually quoted any rental figs - just wanted advice on what type of mge they would require if they moved from their current CTL to secure a more attractive rate.

By the way the investment doesn't come from net profit, but from the element of capital that is not being repaid under the I/O format.

H

holly_hobby

Muddy the waters is in relation to your comment that deduction of interest as tax efficiency is as you put it "a common myth" ... of course businesses may deduct operating costs from gross profit, thats a basic ..

H