Buy To Let, No Mortgage - How Does It Work

steve2005

Sadly I'm not in this position myself but I've just had a friend over for a catchup and they've mentioned this idea to me. I have no idea of the answer but you guys seem to be a collective library of useful information.

Here is scenario:
Person owns 3 properties
1 medium flat worth around £300k with a 65k mortgage outstanding
1 large flat with no mortgage - Rent estimated at £2,500 PCM
1 small flat with no mortgage - Rent estimated at £1,200 PCM

Lets say he was to sell the medium flat for £300, pay off the mortgage and any CGT,
He is now left with £200k (probably more in reality) cash and 2 other flats.
Could he use the £200k as a deposit for a larger mortgage and use the rent from the large and small flats to pay the mortgage off each month?

For info, the small flat is currently empty (not rented out) and he lives in the 3 bedroom flat alone.

ging84

rental income is legitimate income. so of the flats are rented out then it can still count, but the mortgage application is not going to be anywhere near as straight forward as it is for someone on a salary

it is however usually much better to borrow money against the rental properties, as this reduces the amount of tax paid

00ec25

rental income is NOT normally included in the total income when calculating the affordability/borrowing limit for a residential mortgage

I am confused which is the "3 bed flat"?
If you mean that is the medium one then why will he be exposed to CGT when he sells it - has it been rented out in the past such that it has not always been his main home?

provided the cost of borrowing is less than the tax saved then as said above it would be better to borrow against the 2 rental properties and use that money, plus the deposit from the sale of the 300k flat to buy his new residential property - either outright or with a much smaller mortgage . That way he redresses the position he has at the moment where he cannot offset any mortgage interest costs against the rental income as the only mortgage currently in place relates to his residential property

steve2005

The large flat is the 3 bed flat where he is currently living and planning to rent it out and use income from that for the mortgage payments.

The Medium flat is the one that will sell for 300k and has been rented out for the last 3 years after he moved out.

When you say say borrow money against the existing properties, do you mean remortgage?

ging84

it's not strictly a remortgage as you have said the 2 current properties are mortgage free
but yes you would most likely do it with a mortgage
i'm sure if you looked into it there would be other obscure financing options available, but a portfolio of just 2 properties would probably make most of them uneconomical

kingstreet

ging84 wrote: »

it's not strictly a remortgage as you have said the 2 current properties are mortgage free

It's a remortgage of an unencumbered property, TBH.

I'd just suggest your friend speaks to a whole market broker. The BTL sector is still broker-centred and they will find the best products and provide advice on how best to approach this.

silvercar

Mortgage interest is an allowable expense against rental income. It is restricted to the value of the properties when first let. It is the purpose of the loan that counts, not where (or if) it is secured.

steve2005

silvercar wrote: »

Mortgage interest is an allowable expense against rental income. It is restricted to the value of the properties when first let. It is the purpose of the loan that counts, not where (or if) it is secured.

Do you mean that if, for example, the monthly mortage payments are £100, which is £60 LOAN repayment and £40 INTEREST charge, then the he can deduct the £40 each month from the declared income?

Or have I got that totally wrong?

silvercar

steve2005 wrote: »

Do you mean that if, for example, the monthly mortage payments are £100, which is £60 LOAN repayment and £40 INTEREST charge, then the he can deduct the £40 each month from the declared income?

Or have I got that totally wrong?

Essentially yes, provided that whatever the mortgage amount is that produces the mortgage payment is less than the value of the let properties when they were first let.

steve2005

So if property was worth £100k and the mortgage was £50k then this would be ok?

00ec25

there is an important distinction you need to understand between the amount of mortgage which is eligible for tax relief and the amount he can borrow:

the easy one is the total borrowable: a BTL mortgage requires a minimum of 25% deposit so he can only borrow 75% of the value of the property

now the amount eligible for tax relief is the value of the property when the letting business first started, so:

in the case of the small flat this is already let so if he remortgaged this he could borrow up to 75% of its current value but would only be able to offset the interest cost on the proportion of the mortgage based on the value of the property when it was first let

in the case of the large flat you say he has not yet let this out so the offsetable amount would be based on the borrowable amount.

the importance of this is that if the property vale increases and he decides to withdraw equity from a let property he can still offset some of that increase against tax.
Simple example:
Property value when first let £100K, mortgage 75K, amount of loan available for interest offset 75K
say property value increases to 140k. He decides to borrow extra money to fund some improvement works or to act as deposit against another property purchase. Say he increases the mortgage to (140 x 75%) = 105K thus giving him 30k funds to spend, now in this case he can only offset 100k worth of mortgage interest against tax and the other 5k's worth of interest cannot be offset as the total borrowing is now more than the initial value when first let

there are loads of details we could give him but frankly he would be better off posting himself rather than you feeding him second hand