re-mortgage buy to let for second home

gingerfisher

I am sure this question has been asked on here a million times but I just can't seem to find an answer. Any help would be gratefully appreciated.

My mum currently has about a £9000 motgage on a property worth approx. £120,000. with about 10 years until she retires and not a huge amount of pension she is thinking of using the equity in her flat to buy a second property to rent out and give her an income from the rental.
She is moving out of the flat she lives in currently and renting that one out as well.

I am unsure of the best course of action for her to take however. Should she remortgage her current property and use the capital gained to put down a large deposit on a second home and then get a buy to let mortgage while the rent from the tennents in this property would cover the remortgage?
As she would probably move to France on retirement to a house already paid off the money generated would need to cover the costs here with some left over for an income.

It is a minefield of knowledge out there and any advice would be much appreciated.

Notmyrealname

It won't give her as much money as she thinks. On a flat needing a mortgage for £60,000 at 4.5% interest with a £500 a month rent income she will get out of it:

Repayment mortgage: £1716 less costs such as insurance, gas safety check and repairs. There will be tax to pay out of that as well...approximately £600 depending on expenses and personal allowance.

Interest only mortgage: £3,300 less expenses. There will be approximately £600 tax to pay on that, again depending on expenses and personal allowance.

If she is using a letting agency, around 10% of the gross rent will go in fees. Another £200 in LL insurance and gas safety check. So thats £800 a year assuming no repairs. So already you're down to £900 less about £400 tax on the repayment option and £2500 less £400 tax on the interest only option so:

Repayment clears £500 a year based on the example above if using a letting agency until the mortgage has cleared. BUT THIS WILL ACTUALLY DECREASE because the interest portion of the repayment will drop so the net income for tax increases thus increasing the tax bill.

Interest only clears £2100 a year based on the example above if using a letting agency but you won't be paying anything off the loan amount. It is actually probably the best option for a retirement income. The fact the bank owns it doesn't matter. You get to draw more out and after 25 years if it can't be remortgaged you just sell up, pay off the mortgage balance and pocket a lump sum.