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Which is the best......

edited 30 November -1 at 1:00AM in Mortgages & Endowments
16 replies 1.4K views
armourarmour Forumite
311 Posts
edited 30 November -1 at 1:00AM in Mortgages & Endowments
BTL mortgage for my brother's needs.

My bro inherited a 3 bed bungalow. It's worth £370k (probate valuation) &he has a £30k residential mortgage on it.
He wants to mortgage for £180k and let the bungalow (probable rent £1300-£1500/mth), using the excess £150k to purchase outright a house to live in.
He's 52, in steady work (same firm for more than 10 yrs) and earns between £20 & 25k/year.

Thanks in advance.
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Replies

  • ThrugelmirThrugelmir Forumite
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    armour wrote: »
    My bro inherited a 3 bed bungalow. It's worth £370k (probate valuation) &he has a £30k residential mortgage on it.

    Mortgage will need to be repaid from estate or a new mortgage will need to be obtained.

    Releasing equity to purchase another property to live in is not tax efficient. As the interest will be disallowed for tax purposes,
    It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." — George Soros
  • edited 1 February 2013 at 12:39AM
    holly_hobbyholly_hobby Forumite
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    edited 1 February 2013 at 12:39AM
    Please google HMRC BTL permitted deductions for guidance on this, the equity released out of the inherirted property will be tax deductable and on a BTL mortgage, as qualification is capped at the value of the property when it entered commercial let (if already owned at that time).

    If its already let, the element of interest under equity release (classed as capital withdrawal) which may be applied for permitted deduction, is capped at the value or pch price (if bought as a BTL) when it originally entered commercial let (above this sum, its not tax deductable).

    Your accountant will advise.

    Hope this helps

    Holly
  • kingstreetkingstreet Forumite
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    armour wrote: »
    Which is the best...... BTL mortgage for my brother's needs
    You've told us nothing to make any suggestion valid.

    Are you talking about repayment v interest-only?

    Tracker, fixed or discount?

    If you want a glib answer, the best BTL mortgage for your brother is the one which best suits his needs.
    I am a mortgage broker. You should note that this site doesn't check my status as a Mortgage Adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice. Please do not send PMs asking for one-to-one-advice, or representation.
  • armourarmour Forumite
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    Sorry, I havent been very clear.

    My bro. Owned and lived in the bungalow together with our recently deceased mother as joint tenants. He inherited her interest by survivorship. They bought 6 yrs ago. It has never been let out.

    Thrugelmir &Holly, will he be able to withdraw, tax free, the required amount to fund the purchase and will the mortgage created be allowable against tax?

    Kingstreet, my bro intends to retire in 10-12 yrs. I've sugested to him that he should get an interest only mortgage and save the profit on the BTL in a stock market ISA. Repayment of the principle would be from either sale of property or cashing in the ISA.
    As to tracker, fixed or discount that would be a judgement call, my inkling would be for a tracker. What do you all think?
  • edited 1 February 2013 at 9:10PM
    holly_hobbyholly_hobby Forumite
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    edited 1 February 2013 at 9:10PM
    armour wrote: »
    My bro. Owned and lived in the bungalow together with our recently deceased mother as joint tenants. He inherited her interest by survivorship. They bought 6 yrs ago. It has never been let out.

    Ok, it was held under a joint tenancy (with a current 30k os mge - joint or single (his) name doesn't matter), resulting in an automatic transfer of equity to him as the surviving owner upon Mums passing.

    Thats all ok.


    armour wrote: »
    Thrugelmir &Holly, will he be able to withdraw, tax free, the required amount to fund the purchase and will the mortgage created be allowable against tax?

    He will (all things being equal) be able to release equity from his and Mums house, to fund his own residential purchase using a BTL remortgage.

    General criteria, apart from having a resi mge history and clean credit history - is earned income of 25k and rental income of 125% of mge interest (use 6% as a ballpark calc figure).

    As a first time landlord the max LTV will be 75%.

    The amount of mge interest in respect of equity release (which is classed as capital withdrawal for HMRC purposes), and is therefore a permitted HMRC deduction against gross rental income, is capped (in this case) at the value ofthe property when it actually enters commercial let.

    Now obviously this cap doesn't affect him negatively right now, but if he wants to effect future equity releases in correlation with any future increase to value (subject of course to max ltvs of the lender) , then say its worth 150k when it enters the letting market, he will only be able to release capital up to that amount (even if its for example later worth double this figure ), to have the corresponding mge interest be classed as a permitted HMRC deduction (any sum released in excess of this cap and corresponding interest sum is fine, BUT the mge interest in relation to the excess sum won't be a permitted deduction, so he will have to absorb the corresponding interest which will obv reduce his net yield - but thats a discussion for another day).

    He will declare his net (of permitted deductions) rental income via annual self assessment, so he will need to register for this service if he currently doesn’t use it. HMRC will also give him guidance on other permitted deductions, such as management costs, essential repair costs etc, or use an accountant, for ease and detailed tax guidance.

    Hope that’s easy to understand and covers most bases ? (shout if not !)


    armour wrote: »
    Kingstreet, my bro intends to retire in 10-12 yrs. I've sugested to him that he should get an interest only mortgage and save the profit on the BTL in a stock market ISA. Repayment of the principle would be from either sale of property or cashing in the ISA.


    Interest only is a typical BTL mge arrangement and still accepted by lenders (whilst it remains unregulated lending !), however as you have rightly touched on there will come a day of reckoning (repayment) – so forward planning for this event is essential.

    Re investments - Its esp important if he is a higher rate tax payer (or likely to become so when inreceipt of the rental income), to utilise all tax free and favourable investments (in accordance with his risk profile of course), in corrolation with a suitably diversivied portfolio in general. (given that his largest investment, the let property, may be a pretty ill-liquid asset at the reqd selling price when he wants to dispose of it, and also subject to market demand and property price fluctuations of course).

    A good IFA will give appropriate advice given your Bro’s ATR, requirements and aspirations.

    armour wrote: »
    As to tracker, fixed or discount that would be a judgement call, my inkling would be for a tracker. What do you all think?
    armour wrote: »

    Depends upon the net yield, any variable rate (discount,tracker, SVR etc) may be attractive if he can or wants to accommodate future rate increases, given that the rental income may be static for a few yrs to come. If of course he would rather have some determined income for a set period, a fixed would be a suitable choice. Horses for courses really !!

    As I say an Accountant or Tax Adviser will give you great assitance in dealing with HMRC and maximising the investment return, as will a chartered IFA.

    Hope this helps with the basics and gets the ball rolling for you & Bro.


    Holly x
  • armourarmour Forumite
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    Thanks for your detailed answer Holly.

    To summarise;

    Bungalow value £370K before being let-Bro can "offset" interest of up to £370k mortgage against letting income.

    He only wants to borrow 50% of value of bungalow, the interest on which would be more than covered by rental income-no probs there.

    Even with the income from renting the bungalow, he's unlikely to become a higher rate taxpayer.

    I let property myself so I can help him with the self assesment requirement.

    I believe he earns between £20K & £25K/yr-this may restrict the 'pool' of lenders willing to consider him. If so which ones will?

    I don't think he'd want to chop and change mortgage providers every couple of years, indeed it seems to me that the application/setup/booking fees charged preclude this anyway.
    I'm thinking of steering him towards the Principality

    http://www.principality.co.uk/en/Mortgages/Buy-to-Let-Mortgages/Buy-To-Let-2-Year-Tracker-7616.aspx

    I had a 3yr 1% above base BTL with them and, when it ended, they allowed me to move onto the linked discounted rate free of charge.

    I guess what I'm asking is which BTL mortgage provider will:

    a) consider him (given that he earns less than £25K/yr)?
    b) will have (in your opinion) the most competitive rate over the next 10-15 yrs?
  • Dave_HamDave_Ham Forumite
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    Hi there,

    Unfortunately, no-one on here should start specifically name dropping lenders as there are other considerations.

    This should be better suited to a broker who can understand exactly the situation and place with an appropriate lender.

    Aside from minimum income, another consideration is the fact this is a let to buy and therefore some banks will want this done simultaneously (ie property be ready as part of the chain)

    Not many lenders will let him raise the funds in advance of a mov e in the future.

    Best of luck
    I am a Mortgage Broker
    You should note that this site doesn't check my status as a Mortgage Broker, so you need to take my word for it.
    This signature is here as I follow MSE's Mortgage Adviser code of conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
  • armourarmour Forumite
    311 Posts
    Hi Dave, Thanks for your response.

    My bro. has got a broker involved, she was introduced to him by the estate agent who is marketing a house which he has shown an interest in purchasing
    Dave_Ham wrote: »
    Unfortunately, no-one on here should start specifically name dropping lenders

    Why not? Even if my bro. does go with the recommendation of a broker, it surely dosen't do any harm to do some independent research.

    The purchase of the new property and the release of funds for BTL (or should that be LTB) mortgage and, hopefully, tenant moving into the bungalow, will all happen at the same time.
    Are you saying that my bro. may not be able to get some lenders to consider him on this basis?
  • bigadajbigadaj Forumite
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    Stating lenders may be construed as advice, brokers want laying for their time and know.edge and also for insurance in case of claims.

    It's generally considered a poor moe to go with an ea recommended broker, frequent poor review, would be better going for someone independent ideally recommended by family or friends.
  • edited 2 February 2013 at 3:49PM
    holly_hobbyholly_hobby Forumite
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    edited 2 February 2013 at 3:49PM
    Hi there,

    Yes - your understanding of the permitted deductable interest is correct (obv how much is withdrawn of the 350k, will depend upon the lenders max ltv and the future market value of the property).

    Also, whilst it is perfectly ok to discuss lenders in general, as Dave H correctly states, no recommendations should or can be made by any adviser on here, as a full review of your bro and his requirements etc would be reqd (as I stated in my original post inc that relating to investment vehicles)

    The mortgage arrangements will be ..

    Bungalow to be remortgaged to release equity and also let = Buy To Let Mortgage.

    Property to be simultaneously purchased as Bros primary residence = technically a Let To Buy mortgage.

    Lenders whom are agreeable to LTB business, in general and as long as the let property is self sufficient, will set aside any mge commitment on the let unit in assessing your affordability for your residential mortgage.

    There are some lenders however, whom do factor in the btl mge commitment to the affordability assessment - to which given your comments re his level of salary, i would guess that he needs the bungalow's BTL mge effectively ignored, and this is where a broker will assist as they will be aware of each lenders LTB criteria, and which BTL lenders don't have the 25k min salary if this is an issu (and there are a couple whom don't have this restriction).

    You have the bones now to take this forward, utilise your brokers knowledge.

    Incidently an independent mge adviser, compared to an in house adviser of the EA, will usually have access to a much wider range of lenders, and will ensure that the absolute best product and lender is selected for the job reqd. So your Bro may want to consider a 2nd opinion to any advice/recommendation provided by the in house MA.

    Hope this helps

    Holly
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