Larger lump sum or Pension?

kidmugsy

jamesd wrote: »

There's generally less risk than with a BTL mortgage involved because a standard residential mortgage gets extra protection for the borrower compared to the business purpose BTL mortgage. So the business owner gets things like FCA-imposed requirements for forbearance and access to the FOS.
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The lender can go after it anyway if you refuse to pay the mortgage and refuse to or can't sell the let property to repay the mortgage.

So you're suggesting that there is little or no extra risk? Put otherwise, somebody else must be carrying the risk avoided by the borrower. That must presumably be the lender. Why do lenders agree to carry it?

bigadaj

kidmugsy wrote: »

So you're suggesting that there is little or no extra risk? Put otherwise, somebody else must be carrying the risk avoided by the borrower. That must presumably be the lender. Why do lenders agree to carry it?

It depends on how you consider risk. There's nothing stopping someone taking a mortgage on a wholly owned property and using that money as they see fit. The criteria for a residential mortgage also differs,a s this is based normally on earned income, a btl mortgage is normally based on rental yield plus a hefty deposit. One would also expect such an approach to utilise a very low gearing on the residential property, as if this were higher then rates would increase proportionately. The benefit in doing this is slightly minimised by the fact that the mortgage interest is allowable against tax, and so a relatively smaller saving is being made if you are paying less interest.

jamesd

kidmugsy wrote: »

So you're suggesting that there is little or no extra risk?

for the borrowers alone, it depends who you are and how the let property is owned. If it's owned jointly by both of the same parties as on the residential mortgage there's probably a decrease in overall risk because both are already fully liable and they will benefit from the greater regulatory and other protection on residential rather than BTL mortgages, as well as the reduced net cost to them. To see whether there is or isn't a decrease you need to assess the relative values of lower costs and the increased protections against scenarios that might threaten the residence but which wouldn't threaten it if it was not security.

If the let property isn't jointly owned there really is an increase in risk for the other person, not a pure decrease due to lower costs and greater net income. So you need to look at things that could cause them to suffer. I've described one way but there are some others where them taking on joint liability for the debt could hurt them. Another potential one is divorce, which could result in both difficulty in leaving the mortgage debt liability and reduced incentive for the other party to protect them from loss.

So the other party really will need to think about their risk if they aren't already involved.

kidmugsy wrote: »

Put otherwise, somebody else must be carrying the risk avoided by the borrower. That must presumably be the lender. Why do lenders agree to carry it?

BTL mortgages in general may be a more risky product for lenders and BTL funding may be more costly for them. What I'm describing is already very common so there's perhaps also some pricing assumption about extra borrowing from the lender side if a BTL mortgage is used instead of residential. And then there's the different affordability calculation basis, which probably does increase risk to the lenders because it allows greater leverage and reduced protection from borrower's ability to pay out of their own funds. Combine lower costs and more lenders providing greater competition and that can explain the pricing difference.

Thrugelmir

bigadaj wrote: »

It depends on how you consider risk. There's nothing stopping someone taking a mortgage on a wholly owned property and using that money as they see fit.

Many lenders when remortgaging residential property to release sizable equity sums do take the purpose into consideration. Era of property being ATM's has passed.

atush

This is completely routine and your claim is debunked here among other places

unless it is a clearly labeled HMRC link, I am not interested in being taken off to spam city, thanks. And I made no claim to be debunked, jsut said HMRC wants to see clear evidence of where the money came from and what for. And in the above case it is clear the larger IF mtg was not raised to buy the rental property.

Yes, it needs to be done with care. One easy way to do it would be to clear the mortgage on the rental using an increase in borrowing on the current residence, another would be to clear the mortgage on the residence and use a new mortgage on it to clear the rental one.

Exactly, it isn't easy and has to be clear cut. You can't ust say to HMRC what you want, you have to have the paperwork to prove it. And in the OPs case with 2 mtgs raised at different times, they would have to totally refinance at cost. And tell the mtg lender what was up.

bigadaj

Thrugelmir wrote: »

Many lenders when remortgaging residential property to release sizable equity sums do take the purpose into consideration. Era of property being ATM's has passed.

Yes, but raising a low level of equity on a wholly owned house won't raise too many problems, apart from ensuring that the borrower isn't stretched on multiplier of income.

jamesd

atush wrote: »

unless it is a clearly labeled HMRC link, I am not interested in being taken off to spam city, thanks.

Did you even read the direct quote I gave from the HMRC page I linked to directly to that specifically said that the security is irrelevant: "The security for borrowed funds does not determine the use of those funds".

atush wrote: »

And in the above case it is clear the larger IF mtg was not raised to buy the rental property.

The loan does not have to be for the purpose of initial purchase of the property. The additional fund raising merely needs to be for a business purpose. Replacing the existing mortgage on the let property with one at a lower interest cost for the business would be one of those. As you'd know by now if you'd even read just the two direct HMRC links I provided you with and not the accounting web one.

atush

I would not take a link that is not directly labeled from anyone I don't know. Embedding it in your text- it could take me anywhere. So of course I didn't read it.

If you posted it truthfully like Xylo does, all could see where it would take you.

I get this. but in the OPs case, HMRC would see there was no link at all between the higher mtg and the business. The higher mtg was raised to buy the property in question (the residential property). It would seem there would have to be a new, costly at least in fees, remtg for that purpose. but given the tax savings, this could be worth it depending on the fees.

we can debate this till the cows come home, but the OP hasn't said (and I suspect) that only the interest from the 60k mtg is being offset against rental income here. And that is not as financially beneficial as having the larger interest being offset.

jamesd

atush wrote: »

I would not take a link that is not directly labeled from anyone I don't know. Embedding it in your text- it could take me anywhere. So of course I didn't read it. ... If you posted it truthfully like Xylo does, all could see where it would take you.

What is it about the standard way of providing links here and in prose all over the internet that you find untruthful? A poster clicks on the link button after highlighting the text that says what is at the link, then clicks on the link tool and pastes the destination URL. The readers see the destination of the link in their browser status bar or similar and can also copy and paste it as another check. This forum doesn't allow the javascript that can hide the true destination of a link from the browser status bar. Please do become comfortable with how to do that because it'll block you from following most links here or elsewhere on the internet if you don't. This time, though, here are the raw links that I gave in my earlier post:

debunked here: http://www.accountingweb.co.uk/anyanswers/question/tax-let-property
not the property it's secured on: http://www.hmrc.gov.uk/manuals/bimmanual/bim45685.htm
the second of the example 3 links: http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm

It's unlikely that I'll do that again because it's unfair to those who do know how to use their tools to follow links safely to do it this way.
You're right to be cautious about following links - I am - but I do know how to check them first using the standard ways of providing links instead of literal posting of them.

atush wrote: »

I get this. but in the OPs case, HMRC would see there was no link at all between the higher mtg and the business.

They wouldn't see that because there would be a direct link. See the third link above for an example of a business using additional borrowing and the money being used to purchase a holiday home and it being a legitimate deductible interest expense for the portion within the capital and retained profit in the business.

There's another HMRC example, number 2 on that page (and just this time: http://www.hmrc.gov.uk/manuals/bimmanual/bim45700.htm ) about capital drawing where again the money drawn and funded by borrowing is used for a personal purpose. That example is worth reading if you don't yet know about capital account transactions and how they matter for interest deductibility.

atush wrote: »

The higher mtg was raised to buy the property in question (the residential property). It would seem there would have to be a new, costly at least in fees, remtg for that purpose. but given the tax savings, this could be worth it depending on the fees.

There would need to be some additional borrowing, somehow but so long as the business link is clear - like paying off the existing letting property mortgage or adjusting its capital account to show capital being withdrawn from the letting business - that would be fine. But it's still a good idea to get an accountant to check the proposed way because they will both know how to ensure it's properly structured and be on the hook for losses due to wrong advice if they get it wrong.

atush wrote: »

the OP hasn't said (and I suspect) that only the interest from the 60k mtg is being offset against rental income here. And that is not as financially beneficial as having the larger interest being offset.

I agree. If they aren't deducting it they should definitely get an accountant involved because it'll save them a lot of money.

One thing they can't do is just declare that part of the existing mortgage on the place they are living is now a business expense. HMRC would reject that. No problem for an accountant to explain the correct ways to do things, though.

mgdavid

jamesd wrote: »

What is it about the standard way of providing links here ...... that you find untruthful? ....... The readers see the destination of the link in their browser status bar or similar and can also copy and paste it as another check. ........

Off topic, but for even further assurance, the reader can also right click on the hotlink and select Inspect element and check the URL in the page's code.