Equity release and rental tax

rajanm

Hi all,

Myself and my OH are planning to buy a house next year. We already own a flat which is in my name.

The plan is to keep the flat and rent it out and to save up for a deposit for the new house. At the moment, we have about £115,000 left to pay on the flat, having bought it for £181,000 6 years ago (original mortgage was about £146000)


My question is, is it worth taking some equity out of the flat to fund the deposit on the new house?

I know that when we rent the flat out, we'll have to pay tax on the repayment part of the mortgage - would taking extra equity out have any impact on the amount of tax we pay on the rental income?

I'm just trying to work out the most efficient way of using the money we have in the flat. We don't absolutely have to take the equity out of the flat to fund the new home but if it ends up being a more efficient way of using our money then we'd be open to going down that route.

Any advice would be appreciated!

anselld

You would to remortgage on BTL where max LTV is usually 75% so depending on current value of the flat (not what you paid for it) it may not be possible to release much equity. If you can then yes, you will pay less tax on rental income but that on its own is not a valid reason.

AlexMac

The sums might seems a bit marginal, but my gut says if you have a good, low-maintenance, rentable flat in a commutable area with high rental value, you should hang onto it. Even if you stretch yourself now, property’s a good investment assuming you can hack being a landlord, and the other unknowns- (like what if you lose your job, or split up?)
How good are you at spreadsheets and multiple choice questions? Pay attention- I’ll be asking Qs later.
It all depends on the current value of the rental flat, the rate you can re-mortgage at, how much you need more liquid cash now, and your tax rate. In some areas, values are the same as in 2007-8, but you might be in an area where values have climbed. So say your flat is now worth either what you paid for it (£180k) or £210k?. If you re-mortgage on a 75% BTL loan you can lay your hands on an added £20k at the original £180k value, or £40 if it’s inflated to the higher £210k value. You can use the mortgage calculator on any website to work out what that extra borrowing will cost you so you can take a view on what you can afford (remembering that you’ll probably pay more % for a BTL loan than your existing residential mortgage anyway, unless you have a crep loan deal at present).
Whatever it costs, however, only the loan interest will attract tax relief as you can only offset the interest element aganst income- so, assuming you pay 20% tax (i.e.not high rate) on the lower valuation, with say £20k of added borrowings, the interest element will be about £1kp.a. and the saving (at 20% tax) 200 quid a year if your BTL costs 5% a year; twice that if you borrow £40k, and half all that if you pull off a BTL loan at 2.5%.
But you’ll not only get tax relief on the added loan however, but on the full 75% BTL loan; £135k or £160k-ish. So the tax relief benefit ‘in your pocket’ will be in the range £1300 - £1600 pa; and that’s even before you factor in all the other reliefs like fees, maintenance, renewals etc, which can really help too.

And if you’ve already switched off, or can’t hack a tenant phoning you at 3am to ask you to fix a leak, maybe this game ain’t for you….