Renting out a flat - which type of mortgage

decker27

We are looking to buy a house but keep our current flat and rent it out. I assume a number of people are currently in this position where they have 2 properties (one for living in and one for renting).

I wondered what is the best type of mortgage for the flat (rented) property.

Would this be a interest only consent to let mortgage, or are other people opting for a different set up?

BitterAndTwisted

Your lender might be prepared to give you Consent-To-Let but this sort of arrangement would attract either a fee or a higher interest-rate. This sort of arrangement is not open-ended so you might be compelled to convert to a Buy-To-Let mortgage at a later date. These often require that you have 25% equity and the prospective rent is 125% of the mortgage-payments.

Interest-only is unlikely given the current state of the property-market. It's my understanding that lenders are not offering this sort of product any longer.

Werdnal

Is it leasehold? Have you checked the lease to ensure you are permitted to let it?

You can ask for Consent, as above, but lender may up the fees, charge admin or set-up costs, reserve the right to review the consent every year (and rescind it if they choose) and even specify who you can let it to and what level of rent you should charge. Search for "consent to let" as there a numerous threads about it on the forum.

If the lender refuses, you would have no option but to change to a BTL loan.

Are you aware of all the other rules, regs, costs and laws surrounding letting?

Good newbie info here:

http://forums.moneysavingexpert.com/showpost.php?p=41160642&postcount=12

BitterAndTwisted

Once you decide to let a property you are running a business. Therefore you need a business-plan.

Consider the worst-case scenario and work from there. Could you afford to pay two mortgages if the property would be void for any length of time? Do you have the nerve, funds, time and energy to run such a business? Lettings don't just run themselves and you rake in a profit. You would be dealing with members of the public who can and do act in extraordinary ways. Like not paying the rent and trashing the place while you spend a mint in trying to evict them. If you don't fancy the prospect of any of that, don't do it.

holly_hobby

As stated, if your lease terms permit you to let, you either seek consent to let from your current lender, which is typically timebound to 3 yrs, with a loading to svr and doubtful you will be able to change to interest only.

Or you remortgage onto a Buy To Let mortgage - which is unregulated lending, and as such all BTL products are available on true interest only.

BTL mges - the property (if acceptable) must be self sufficient, with max ltv of 75% as a first time landlord, with rental income 125% of mge interest (use 6% as a ballpark calc figure), whilst some lenders also require the mortgagor to have a min earned income of 25k.

I am sure before you go down this road, you would make yourself aware of landlord responsibilities, planning and costs, together with taxes including annual SA reporting of net rental income.

Hope this helps

Holly

JimmyTheWig

decker27 wrote: »

We are looking to buy a house but keep our current flat and rent it out. I assume a number of people are currently in this position where they have 2 properties (one for living in and one for renting).

Am I right in thinking that if the OP does this they wouldn't be able to offset their mortgage interest from their rental income for income tax purposes?

Werdnal

JimmyTheWig wrote: »

Am I right in thinking that if the OP does this they wouldn't be able to offset their mortgage interest from their rental income for income tax purposes?

If you can prove that you borrowed funds to buy a property to let, yes you can use the mortgage interest against the rental income tax liability. I looked into it years ago, when I put my first rental property on the market (no mortgage on either that or my own home), and was looking at funding to buy a larger BTL. You can either take a mortgage direct on the BTL property, with an obvious link to the BTL mortgage, or release equity via the residential property with a resi mortgage, and use this to buy a property to let. Its the papertrail to prove the reason for the mortgage that is important - not necessarily which property the money is borrowed against.

However, it sound like OP's is a clear case of keeping the mortgage on the let property (either with CTL or changing to BTL), then taking a 2nd mortgage on a resi property to live in.

OP, you must remember that letting is not guaranteed income, and you could have 2 mortgages to support with no rent coming in for a variety or reasons - would you be able to afford this?

decker27

Werdnal wrote: »

If you can prove that you borrowed funds to buy a property to let, yes you can use the mortgage interest against the rental income tax liability.

We initially got a mortgage (on the flat) to buy the property to live in, it is only now we are looking to let the property and although this would require a new borrowed funds agreement (mortgage) we are not buying the property we are already the owners - not sure if this technically makes a difference

JimmyTheWig wrote: »

Am I right in thinking that if the OP does this they wouldn't be able to offset their mortgage interest from their rental income for income tax purposes?

I think I will need to read Werdnal original helpful link as this was why I asked how other people had gone about letting a second property in terms of income/tax/mortgage/etc

holly_hobby

When the flat enters commerical let (which includes the marketing period), the mortgage interest IS a permitted deduction against rental income - as it is a permitted business expense.

Complications later come when we are effecting equity release exercises, but for now, the total mge interest will be a permitted deduction.

Hope this helps

Holly

JimmyTheWig

JimmyTheWig wrote: »

Am I right in thinking that if the OP does this they wouldn't be able to offset their mortgage interest from their rental income for income tax purposes?

Sorry, I was talking rubbish here.
The existing mortgage on the existing flat was used to buy the flat. So of course the interest can be deductable.

[The situation where it isn't is if you have paid off the mortgage on the flat and then mortgage the flat to buy a house to live in.]

holly_hobby

JimmyTheWig wrote: »

[The situation where it isn't is if you have paid off the mortgage on the flat and then mortgage the flat to buy a house to live in.]

No Jim it still is ...

In fact this is the best way to fund the pch of your own private home, as the capital released (and associated interest) from any loan the business takes to satisfy the equity release, is tax deductable (as it is classed as capital withdrawal), whereby a residential mge no longer has any tax breaks (post MIRAS abolition that went a long time ago ! sob !!)

The only time when the interest wouldn't be deductable, is where the underlying loan exceeds the original value of the property when it entered the business - as this in effect takes the business account overdrawn for HMRC purposes, so in that case only part of the interest would be a permitted deduction.

Hope this helps

Holly