Leverage - Buy-to-let

SWo777

Hi

I am about to move into buy-to-let. I have sufficient cash for a deposit. My plan was, primarily and very simply, over the next few years to create a property portfolio - via capital repayment mortgages - which would generate rental income for my retirement. By the time I retire I would own outright all properties. Further there appeared to be the added benefits that my spouse would benefit from in its entirety on my death as well as my children on hers.

However, I had a long chat yesterday with a financial advisor who advised against this plan, offering something far more aggressive. In essence the suggestion was to use the cash to payoff what is outstanding on my existing mortgage, remortgage my own house to the value of 4 times the cash I currently have available for the deposit and in the short term look to buy several 4 buy-to-lets - all interest only mortgages. He suggested numerous advantages in terms of maintaining the debt with respect to various taxes, particularly business and inheritence tax.

Now I can see much financial sense in what is being suggested. I can see the many benefits of locking in current low interest rates via fixed term mortgage deals, capital appreciation of the asset. However, I feel uncomfortable with the notion of carrying what would be 7 times as much debt as I would have with my original ideas. I feel that

a) being highly leveraged could be risky should interest rates move badly against me. His argument is that you are creating a pot "in the good times" (ie during the period of the fixed term) to provide a buffer should that eventuality arise

b) should the rental market flood and rental values decline I am not as badly exposed

c) a prolonged period of lack of tenants is a risk either way.

As I have said, I can many benefits of this approach but wonder whether the debt will cast a shadow since I don't like the idea of living with debt.

I'd appreciate any comments/criticisms on the ideas offered here (both mine and my advisors) and if there is a middle way whereby debt is minimised and either more revenue is generated or tax is minimised.

Many thx

S

Richard_Watters

The alternative suggested is undoubtedly a higher risk strategy and what you decide to do comes down to your attitude to risk.

However, if you cover the risks the alternative can still be relatively low risk, i.e:

Ensure your monthly mortgage repayments (including the remortgage on your own home) are covered by the rental income allowing for:

Voids/non-payment of rents (assume 15% of rental)
Repairs (assume 15% of rental income)
Rise in interest rates*
Management fees (assume 15% of rental income, unless you'll self-manage)

*this is the difficult one - we've seen how rates have come down to a level no-one thought possible so who can predict what they will rise to in these uncertain times?

I'd look at the numbers, look at the worst case scenario and then decide if you're comfortable with the risk.

The likelihood is that in the long terms capital values will increase and you'll be leveraged to get 4 x the benefit if you go for the more aggressive strategy. However if prices fall you'll be more exposed. With interest-only mortgages you'll still have to repay them sometime - your absolute worst case scenario here is that they'll be in negative equity when they're due to be repaid.

BazzaDP

SWo777 wrote: »

I am about to move into buy-to-let.

So first one? What if you don't make as much money as you thought? What if you don't like it - e.g. If it's more hassle than it's worth or less easy to make money than you thought?

A few years ago, lots of people did what you did cause house prices could never go down. Now you are proposing doing the exact same thing cause unsubstainably low interest rate mean you can't fail to make a profit. I wonder how this one will pan out...

And that's ignoring the question of whether the bank will even lend to that leverage!

Start small and build up before you (literally!) risk your house and home on it.

tim123456789

SWo777 wrote: »

Hi

I am about to move into buy-to-let. I have sufficient cash for a deposit. My plan was, primarily and very simply, over the next few years to create a property portfolio - via capital repayment mortgages - which would generate rental income for my retirement. By the time I retire I would own outright all properties. Further there appeared to be the added benefits that my spouse would benefit from in its entirety on my death as well as my children on hers.

However, I had a long chat yesterday with a financial advisor who advised against this plan, offering something far more aggressive.

well of course he would

the more financial products that you need to buy the more that there's in it for him.

I didn't read the rest of your post, so I don't know what you are feeling are about this advice, but don't be pushed by this guy.

Make your own mind up.

If you feel that he is pushing you towards too much risk just say NO!

tim