Buy to let and home mortgage question

Cruixer

Hi all,
First post, just joined the site today.

I own a small flat which I had originally intended living in but a long story involving working overseas and later getting married meant that when I moved back we instead bought a house together and the flat has remained rented out. Now I was pretty much making a loss on it until recently as the loan interest, management fees etc was higher than the income but with low interest rates and the owed amount falling I am starting to pay a fair bit of tax on the rental income.

It struck me that it would be better for me if I could re-mortgage the flat, ideally to 100% of its value and use the money to pay off a portion of the mortgage on my home reducing my tax liability and my home mortgage at the same time. Does anyone know if lenders would be likely to entertain such a scheme or if there are any flaws in this plan that I haven't considered.

Thanks in advance, any thoughts appreciated.

kingstreet

No. Maximum loan to value for a BTL product is 75%.

Crashandburn

As an existing landlord, you can remortgage up to 80% loan to value.

The major flaw in the plan is how you will then offset this higher cost against your income on the basis you can only offset the interest on the debt incurred by obtaining the asset and not from any capital raising.

Cruixer

Thanks Crashandburn, I see what you are saying, I thought that I would be able to claim for interest on a mortgage up to the value of the original purchase price, is this not the case? So for example, if the original cost of the flat was £100k and my current mortgage was £60k, could I re-mortgage to the maximum of £80k and use the £20k gained to pay off part of my home mortgage?

Thanks Kingstreet too.

Crashandburn

So in that case, you obtained a £60k mortgage to get the asset.

If you were taking the £20k out and buying another buy to let, then yes you could offset that part too, but worth getting specific tax advice on what you're trying to do rather than the ramblings on a forum.

Thrugelmir

Cruixer wrote: »

I thought that I would be able to claim for interest on a mortgage up to the value of the original purchase price,

In terms of tax treatment you are correct.

However the hurdle is finding a lender willing to play ball.

Cruixer

Thanks for the replies folks, I can see that as has been said, the biggest problem might be to get a lender to play ball. As it sounds like this is probably not going to be an option, would it make sense to try and move this to an interest only mortgage? I am just thinking that for the future that my tax liability is going to get higher and it would seem to make sense to pay the capital off my home before I pay it off the rented property?

holly_hobby

If its currently under a consent to let arrangement - I doubt you will be able to switch to IO.

So that would involve a switch onto a BTL product or a remortgage to a new BTL lender.

With regards to the permitted offsetting of mge interest against rental income.

Simply, you are permitted to offset mge interest on a mge equal to the value of the property when it entered commercial let OR the purchase price when it was pchd as a let.

So, lets be clear, if you purchased for 100k (regardless of what mge was secured to complete the purchase) and it was immediately let on pch, you may offset mge interest up to a mge value of 100k. This is because for HMRC purposes, its classed as business capital withdrawal.

Now, you may continue to release further equity as you go along (obv subject to market val increases and status) either via a Further Advance or a remortgage. This is of course permitted mge wise, even if this exceeds the original 100k pch price, the main issue being that the HMRC permitted and offsetable mge interest, will be capped at 100k - with any mge interest incurred above this figure simply not a permitted deduction (so of course this must be considered alongside how it would affect your net yield, but otherwise fairly simple really !).

Now, obv as you can't effect a 100% BTL mge, the above exercises would only be facilitated via an increase in the market value of your property, and the max BTL LTV you are able to source (notwithstanding lender status requirements of the applicant).

Hope this helps

Holly

Cruixer

Thanks Holly, that does help. It is a BTL mortgage, and I think it is possible to switch to interest only but I was waiting off on that decision to explore whether I could increase the value of the mortgage. It sounds like although my plan works in theory, getting a lender to allow me to re-mortgage even up to 80% LTV when I am not putting the money back into the property might not be likely.

In general does it make financial sense to keep the mortgage on the rental high (and using the money saved to pay off the home mortgage)? I am presuming it does due to the tax liability involved when the interest and costs are less than income but am I missing anything here?

holly_hobby

It is already on a BTL arrangement - then yes you should be able to switch to IO borrowing, as BTL lending is essentially semi-commerical borrowing and unregulated. (ie the FSA recent IO remits don't apply).

You could certainly remortgage upto 80% LTV , remember max borrowing of 100k (ie your original pch price), to retain the benefit of full mge interest deduction. Subject to rental income being 125% of the chargeable mge interest, and any lender min earned income requirements (which some operate at 25k).

You don't have to re-invest any released equity back into the BTL, as for HMRC and mge purposes its classed as capital withdrawal.

If you have any surplus cash, profit from rental etc, use this to reduce your own residential mge (keep lump sums within annual penatly free remits, etc). Which although your resi mge will probably be on a lower pay rate than your BTL, it affords you no tax breaks, so essentially will probably be costing more on an equivilent sum over an equivilent term (NB - this is a broad and generic assumption given that I don't know the actual figs involved).

You could of course choose to reduce your BTL mge instead/as well, which will result in a higher net yield, but of course the larger the net yield, the higher the tax exposure (to which I am guessing you are a tax payer, so this will be v relevenat, esp if higher net rental income will tip you over into 40% tax bracket).

To which, always ensure you are offsetting ALL permitted deductions (as there are no prizes for incurring and paying a higher than necessary tax liability !), and that you are of course submitting your annual SA on time every yr (to avoid any late penalties effectively further reducing your net return).

Of course your accountant or tax adviser, will be pleased to confirm/expand upon all the above and more, with their professional fees also a permitted deduction.

Hope this helps

Holly x

real1314

Hmm...


If the BTL flat was originally purchased or first let at a value of £100k, then as others have said, that is the maximum value of mortgage you can claim for against it...

but...

As you used £60k mortgage and £40k of your own capital (whether as cash or as equity in the proprerty) you are free to withdraw that £40k capital.
You can replace the £40k funding gap with any other form of lending (afaik) - this could be from a mortgage which is secured on your own residential property.

In essence I don't think you need to do anything, just claim for £40k worth of your residential mortgage against tax.
You could get an accountant to sort it out for you, or you could probably just notify HMRC of your intention.

It's no different from anyone who starts up a business using funding secured on their residential home. :cool: