offset mortgage on rental ' is this a good idea or not?'

rhubarb_and_custard_3

:eek: I currently have a large mortgage on the house i live in, we have a couple of rented properties with a small mortgage on one. we feel as if we are living beyond our meens. we have decided to put more mortgage on the rentals and shrink our mortgage on the house we live in, thus getting more tax relief on the rentals. we are also thinking about going to interest only. has anyone else had experience of this...

MarkyMarkD

OK, as long as you don't try to offset mortgage interest on more borrowings than the total value of the rental properties when you started renting them out.

Apart from that, it's a good idea. And no point being anything other than interest only on the rental property-related mortgage especially if you have cash-flow issues.

silvercar

I suggest you see an accountant.

To claim mortgage interest as an allowable expense against your rental income, the money does not have to be secured on the property that is being let.

Mortgage interest on your home can be offset against rental income. The total interest claimed cannot exceed the value of the rental property at the time you started letting it. If your let property is not mortgage upto its initial letting value then there is some interest on your home that could be considered an expense of the letting business.

(If you didn't have the letting business, you would sell that property and the money would repay the home mortgage, so you are only keeping the home mortgage going to fund the letting business.)

MarkyMarkD

Silvercar's answer is more complete and more accurate than mine, although I hadn't thought as hard as he has about the pre-existing borrowing on the residential property.

I think that it is a bit debatable - if (say) you inherited the rental properties unencumbered and already let out and then borrowed against them, would what you say apply, silvercar? Surely then you've inherited a rental business which doesn't require any borrowing and the pre-existing residential mortgage is irrelevant?

If, however, you bought your first BTL property with an 85% BTL mortgage and 15% of the money from your own resources, then the whole 100% is interest offsettable even though 15% of it is secured against the residential property. That bit I understand.

BTW I also don't really understand why the total amount of debt you can offset interest on doesn't change in line with the net borrowing required by the rental business. In other words, if you buy a house for £50k, you can obviously offset borrowings on £50k. But if you then make £5k profit in year 1, the rental business's borrowing requirement has fallen to £45k unless it paid out the £5k to its owner. But why should you be able to withdraw that money from your business whilst still getting tax relief for borrowing it? Do you see what I mean?

Conversely, if the rental business makes a taxable loss, surely the amount eligible for interest relief increases above the property's original purchase price?

nrsql

I believe the funds have to be borrowed to purchase or improve the property to be allowable against the rental income.
So you could take out a mortgage on your residential property and offset against the rental income for tax.
But you can't take out (or increase) a mortgage on a rental property, pocket the cash and offset the interest against income.
At least you shouldn't but I suspect a number of people do risk it.

I wouldn't be surprised if there weren't a lot of people sitting on completely offset large residential mortgages waiting to snap up rental properties when/if the long awaited crash comes about.