Mortgage vs. Buying Outright

Big_Ed

It seems that buying outright used to be frowned upon (from past topics on this board anyway). Is this still the case?

My parents (soon to retire) want to invest some of their savings into a buy to let. Would it be better for them to buy it outright (yearly income will only be slightly above taxable level), or get a mortgage (this will be slightly more complicated since they would gift me the deposit and I would get the mortgage).

One way they get a higher income but at the risk of using a large percentage of their savings. The other way they get a fairly small income (though reasonable), and have to pay interest... but also have more rainy day/investment money left.

Thanks for any advice.
I'll look into discussing this with a financial adviser but was hoping someone on here could give me general advice on which is usually better.

marathonic

I think the main reason it's 'frowned upon' is due to the tax benefits of having a BTL mortgage.

However, if your parents are only slightly above the taxable level, these benefits are negligible.

That being said, I'd question the suitability of a BTL as an investment for a retiring couple with such a low income. It's putting all your eggs into one basket.

Big_Ed

Thanks. Yes that's why I thought it was better to ask - ie. the tax benefits will be small when offset against interest.
Sorry I think I should have made it clearer; they will have pensions, but one will be very small (pension, not parent) and so the rental property will sort of help with that.
I shall try my best to advise them of other baskets as well

marathonic

How soon is 'soon to retire' and are they higher rate tax payers at the moment - or does their employers do salary sacrifice?

If retirement is a few years away and they fall into one of the above two categories, it might be worth them living off the money they were going to put towards the BTL and ploughing as much as their pension schemes allow towards their pension.

They could then revisit the BTL idea when they qualify for their 25% Tax Free Lump Sum.

somethingcorporate

Unless they are experienced or lucky you may find the rental yield would be less than what they could get back sensibly invested elsewhere or even in a bank account.

Plus do they want the hassle and issues of becoming a professional landlord? It's not a walk in the park and unless they are in it for the very long term there are safer and far less stressful things to do with their money.

Being a landlord has very serious financial and legal ramifications if they get it wrong (big fines/imprisonment etc) so do your research beforehand. It is not just about the money.

Big_Ed

@marathonic - both will be fully retired before the end of the year so unfortunately no chance of increasing pension etc.

somethingcorporate wrote: »

Unless they are experienced or lucky you may find the rental yield would be less than what they could get back sensibly invested elsewhere or even in a bank account.

Do you have any other investments in mind or do you mean general savings accounts? Savings accounts are currently ~3%. The net yield should be higher than this (obviously with far more risk).

Thanks again for all these replies.

princeofpounds

You should discuss this with a financial advisor. It is not as straightforward as it sounds.

For instance, if they are approaching retirement, their tax positions are likely to change substantially as a result. It might make sense, for example, to inject some of the money into a pension first to avoid tax whilst still earning, then to buy rental property later either from the pension proceeds or even within the pension in a SIPP form (not applicable for residential BTL but just an example).

Inheritance issues are also important. Deprivation of capital issues are important.

(this will be slightly more complicated since they would gift me the deposit and I would get the mortgage).

hmmmm you are opening up a can of worms there!

jimjames

Big_Ed wrote: »

@marathonic - both will be fully retired before the end of the year so unfortunately no chance of increasing pension etc.



Do you have any other investments in mind or do you mean general savings accounts? Savings accounts are currently ~3%. The net yield should be higher than this (obviously with far more risk).

Thanks again for all these replies.

Not sure on area of country or property they are looking at but for our property the gross yield is 6%. Even if they pay no tax on pension the income could take them over the threshold for 20% tax.

You also have the costs of buying and (obviously later) selling so you may find the net yield isn't much above 3% and need to decide if it is worth it for the risk and hassle. You are unlikely to get much above the yield they could get on an equity income fund at around 4.5% and that has no hassle and a less risk. If it is a large proportion of their savings then in my view it would not be sensible to put it all into BTL.

As a comparison our net yield was 2.9% for the last tax year but that includes tax at 20 & 40%.

atush

interest is an allowable expense against rental income, so would be better to have some leverage.

Having said this, I would not advise a rental property for a retirement couple unless it is only a fraction of their holdings and that isn't the case here.

marathonic

atush wrote: »

interest is an allowable expense against rental income, so would be better to have some leverage.

Having said this, I would not advise a rental property for a retirement couple unless it is only a fraction of their holdings and that isn't the case here.

I agree totally. A retired couple should only consider a rental property if relatively frequent 6-month voids wouldn't cause any requirement to adjust expenditure or worry in any way.

As you say, that doesn't appear to be the case here!