Considering Buy-to-Let - how much mortgage should I take out?

steviebilbo

Having worked hard all my life and saved very hard, I am in the fortunate position to be able to afford a second property and have been researching the BTL market for quite some time. I have a 'family friend' tennant waiting and I am prepared to offer a substantial rent discount (12%) for the knowledge they will rent for about 5 years total. The question is, if I take out a smaller mortgage and use more of my cash to finance the deal and pay more tax on the larger rental profit, will I be any better off than if I take a larger mortgage with bigger tax deductable but smaller rental profit?

House will be in joint names etc. and neither of us will be higher rate taxpayers and we are intending to remortgage on current property at existing facility rate of 3.9% for a period of ten years interest only.

Assuming other outgoings are identical and gross rental income is £700 pcm, the options are:

1) 50k remortgage at 3.9% costing £163 per month - this will cost 19500 interest over ten years

2) 30k remortgage at 3.9% costing £98 - this will cost £11700 interest over ten years

I would have thought it more profitable to pay tax on the extra profit. 20% of £65/2 = £6.50 each and opt for the smaller mortgage ...

or am i missing something?

Thanks for any input!

Thrugelmir

Interest only. Unlikely.

You'll most likely require a repayment vehicle to do so.

You'll need to disclose purpose of equity withdrawl. Application may be declined as well.

G_M

steviebilbo wrote: »

...... I have a 'family friend' tennant waiting and I am prepared to offer a substantial rent discount (12%) for the knowledge they will rent for about 5 years total. ....
There are pros/cons to this you need to weigh up carefully. The advice to new landlords here is not to " let to friends or family - only to people you will be willing to evict if you have to, and losing whose friendship you are not concerned about." Against this you can balance the advantage of a 5 year rental (though of course no one can guarantee what will happen over 5 years, and any tenancy contract over 3 years would have serious legal implications).


Assuming other outgoings are identical and gross rental income is £700 pcm, the options are:

1) 50k remortgage at 3.9% costing £163 per month = £1,956 pa to offset against tax- this will cost 19500 interest over ten years I suspect you'll struggle to get an interest only mortgage.

2) 30k remortgage at 3.9% costing £98 = £1,176 pa- this will cost £11700 interest over ten years

I would have thought it more profitable to pay tax on the extra profit. 20% of £65/2 = £6.50 each and opt for the smaller mortgage ...


Thanks for any input!

You need to work out your annual budget. Rental income Vs allowable expenses which include but are not confined to the figures above.

Then you can compare the extra tax you'l pay/save against the extra mortgage costs.

anselld

steviebilbo wrote: »

I would have thought it more profitable to pay tax on the extra profit. 20% of £65/2 = £6.50 each and opt for the smaller mortgage ...

It depends what rate you think you will get on money in the bank. If your net savings rate is higher than your net borrowing rate then it pays to borrow more.

steviebilbo

anselld wrote: »

It depends what rate you think you will get on money in the bank. If your net savings rate is higher than your net borrowing rate then it pays to borrow more.

Thanks for that Anselld, I was assuming that in general it usually costs more % to borrow than you can make on savings %.. note I say generally and usually.

steviebilbo

G_M wrote: »

You need to work out your annual budget. Rental income Vs allowable expenses which include but are not confined to the figures above.

Then you can compare the extra tax you'l pay/save against the extra mortgage costs.

Thanks for that G_M, I had calculated the same figures as you will see from my OP... I also thought that if all other outgoings were identical then it was just the mortgage interest and subsequent tax reduction that would be involved, is it not?

steviebilbo

Thrugelmir wrote: »

Interest only. Unlikely.

You'll most likely require a repayment vehicle to do so.

You'll need to disclose purpose of equity withdrawl. Application may be declined as well.

Thanks for your response Thrugelmir, I probably didn't fully explain in my OP but I have already secured the mortgage as an extention of my exisiting 'Facility' with RBS One Account. I have told them I intend to purchase a BTL and they assured me (on 3 seperate occasions now) that as I am securing against my current property then they have no interest in what I use the money for nor is there any loading etc. and even better no arrangement fee as it is just an adjustment of my existing facility which has over 10 years left to run.. My One Account worked for me!

G_M

steviebilbo wrote: »

Thanks for that G_M, I had calculated the same figures as you will see from my OP... I also thought that if all other outgoings were identical then it was just the mortgage interest and subsequent tax reduction that would be involved, is it not?

So how much do you anticipate your tax bill will be in year 1 under each scenario?
And how much will be your mortgage repayments in year 1 for each scenario?
And (as anselld says) how much (net) would you earn in a savings account in year 1 from the additional cash if you take the higher loan?

steviebilbo

G_M wrote: »

So how much do you anticipate your tax bill will be in year 1 under each scenario?
And how much will be your mortgage repayments in year 1 for each scenario?
And (as anselld says) how much (net) would you earn in a savings account in year 1 from the additional cash if you take the higher loan?

Apologies G_M, the figures I meant in my reply were the total morgtage payments you quoted in red ( I didn't divide by ten but quoted for the whole term) I have not yet begun to calculate my tax liability. I was begnining to put together a budget plan when the question in my OP raised its head..

Mortgage payments are already quoted (by us both) mine as over 10 years and yours as yearly.

At this point in the procedings I was simply trying to establish that with identical outgoings in each scenario apart from the mortgage repayment premium, if there was a general principal to decide whether one scenario was preferable to the other... I am now beginning to think that it is not as simple as it might first appear.

I am not sure I understand the second question fully but if I were to take the higher loan and invest the other £20K in a savings account the best I can expect is around 4% gross without changing bank accounts (which would lose me my mortgage anyway). That 20k would cost me 3.9% so would there be any point in saving for what would be by my initial calculations somewhere in the region of £140 (each) a year? Plus if the savings rate is fixed and the mortgage rate is variable then I run the risk of losing out... do I not?

Thrugelmir

steviebilbo wrote: »

Thanks for your response Thrugelmir, I probably didn't fully explain in my OP but I have already secured the mortgage as an extention of my exisiting 'Facility' with RBS One Account. I have told them I intend to purchase a BTL and they assured me (on 3 seperate occasions now) that as I am securing against my current property then they have no interest in what I use the money for nor is there any loading etc. and even better no arrangement fee as it is just an adjustment of my existing facility which has over 10 years left to run.. My One Account worked for me!

You still have the issue that the facility ends in 10 years time. Recently posters have reported that RBS is now seeking a reduction in the One Account facility in the absence of a repayment plan or noticeable reduction in the facility being used.

A little taste of the view from the FSA.

MCOB 11 requires lenders to consider a customer’s ability to repay before they enter into, or make a further advance on, a mortgage contract. This chapter sets some guidelines but it is mainly up to individual lenders to decide their own approach and what factors to use.

For interest-only mortgages, we expect a policy at least to include three things. These are: how the lender checks the customer has a strategy to repay the capital; how they assess each strategy they allow as plausible; and if the strategy requires payments to
be made, how the lender takes them into account and assesses affordability.
We have looked at a representative sample of firms’ Responsible Lending Policies and held discussions with several market leading lenders. We have identified some examples of good practice, where lenders developed their approach to some specific post-sale challenges of interest-only lending and have come up with processes to mitigate the relevant risks.

There is a fundamental change of mindset on the part of lenders.

Notmyrealname

Thrugelmir wrote: »

Interest only. Unlikely.

You're talking rubbish.

You'll most likely require a repayment vehicle to do so.

No he won't

You'll need to disclose purpose of equity withdrawl. Application may be declined as well.

I had no trouble doing it. Let to Buy mortgage - right product for the job.