Using equity in one house to buy another

blue_eyes777

Hello all.
I do apologise if I have posted this in the wrong forum.
My wife has a property (which she is currently letting) worth around £350k with a current mortgage of £185 k. She is interested in raising capital for a deposit on a second buy to let property from the equity in her property. She is looking at properties around £270 K in value and a mortgage broker/advisor has advised that this is eminently possible, by remortgaging the existing property to raise the capital.
Here are some of the figures :
The Buy to Let remortgage of the current property would come with free valuation and free solicitors – this would be £468 a month (interest only). With an arrangement fee of £1995 which can be added to the loan.

The new buy to let purchase of £270,000 with a 75% mortgage of £202,500 on interest only would be £346 a month. An arrangement fee would be £1995 again added to the loan. The fees payable upfront for this would be £346 for the valuation – then the solicitors costs – approx. about £1,200 payable towards the end of the transaction.
Apparently, the initial interest rate will be 2.99 on a 2 year fix reverting to 3.99 after 2 years. My wife would actually hope to do a repayment on both mortgages instead of interest only. The rental for her property is £1200 and she would be likely to achieve £1100 on the new property at £270k.

My question is – does anybody think that our plan is a good one? Or do you think that it will put my wife at unnecessary financial risk? It is a long-term plan.
Thanks 

Daniel54

blue_eyes777 wrote: »

Hello all.
I do apologise if I have posted this in the wrong forum.
My wife has a property (which she is currently letting) worth around £350k with a current mortgage of £185 k. She is interested in raising capital for a deposit on a second buy to let property from the equity in her property. She is looking at properties around £270 K in value and a mortgage broker/advisor has advised that this is eminently possible, by remortgaging the existing property to raise the capital.
Here are some of the figures :
The Buy to Let remortgage of the current property would come with free valuation and free solicitors – this would be £468 a month (interest only). With an arrangement fee of £1995 which can be added to the loan.

The new buy to let purchase of £270,000 with a 75% mortgage of £202,500 on interest only would be £346 a month. An arrangement fee would be £1995 again added to the loan. The fees payable upfront for this would be £346 for the valuation – then the solicitors costs – approx. about £1,200 payable towards the end of the transaction.
Apparently, the initial interest rate will be 2.99 on a 2 year fix reverting to 3.99 after 2 years. My wife would actually hope to do a repayment on both mortgages instead of interest only. The rental for her property is £1200 and she would be likely to achieve £1100 on the new property at £270k.

My question is – does anybody think that our plan is a good one? Or do you think that it will put my wife at unnecessary financial risk? It is a long-term plan.
Thanks 

From your numbers your wife would have borrowings of £455k,which seems pretty frightening to start off with
Yields look low
A lot of risk for not much return,in my view

holly_hobby

Remember she can only offset associated interest of her mortgages, not any capital repayments, against rental receipts.

The current property is a BTL, and the equity being released is solely to fund the pch of a 2nd BTL (with its own mortgage).

This means that the associated interest on the increased mge borrowings on prop no 1 is also tax dedcutable, although take note this is capped at a total mge equal to the pch price of the property, or its value, when it originally entered commercial let (which would be appropriate if it was previously your primary residence, which you have moved out of and subsequently let). The released equity is accepted by HMRC as a permitted deduction, as it is classed as capital withdrawal from the business (even if a loan is funding it).

Additionally, if these are her only investment vehicles, she should consider some immediate access deposits and really some general diversification within her portfolio (especially to protect against non-systemic issues), such as general market drop or localised price fluctuations, falling market demand for the type of property or area (esp if she is tying up a lot of equity in the properties, loss of yield during periods of non-tenancy, the list goes on !), although if in central London she typically won't be exposed to wildly variant property fluctuations and ill-liquidity, as possibly experienced in other parts of the UK, generally due to a constant demand in central London and immediate surrounding areas.

As a married couple, consider holding as tenants in common if 1 of you have a higher tax liability than that other, in order to declare the bulk of rental income under the lower tax payer - your accountant will take you through the whys and wherefore's in more detail, including completion of HMRC Form 17 to register the split.

Don't forget legal/beneficial owners exposure to CGT liabilities on disposal.

Hope this helps

Holly

Let_Us_See

blue_eyes777 wrote: »

The new buy to let purchase of £270,000 with a 75% mortgage of £202,500 on interest only would be £346 a month. An arrangement fee would be £1995 again added to the loan. The fees payable upfront for this would be £346 for the valuation – then the solicitors costs – approx. about £1,200 payable towards the end of the transaction.

Psst...have you overlooked the £8,100 stamp duty on the proposed purchase?

blue_eyes777

Hi all.
Thank you for your responses.
First, we haven't forgotten the Stamp Duty - that will have to come out of savings (ouch!):(
Second, I agree that £455k does sound scary - but there will be 25% equity in each property to guard against falls. Both properties are inside the M25 area and in extremely popular areas right now where houses are selling within days. But of course, the market will change eventually!
In terms of yield, the figures are much better if my wife takes out one/both of the mortgages on an interest only basis - where the rent should exceed the mortgage payment by £700 to £800. I agree, that if the mortgages were repayment, there would be little left over, but at least they would be paid off at the end of the term.
There does seem to be significant confidence that house prices in this area will increase 25% by 2020 - but of course, this is just a projection.

blue_eyes777

Holly- your information is amazing. Thank you.
Do you think the project is viable - or more viable if we go for interest only on at least one mortgage?

getmore4less

I would be trying to find lower cost long term trackers, the remortgage fees will wipe out any saving on the 2 year deal and the gross yield on property 1 is only 4% so that will be marginal and property 2 is going to be around 4.6% gross yield. (270 + 8 sdlt + 5k fees)

voids and a few maintenance bills and this is a property HPI gamble not a viable letting business.

blue_eyes777

Thank you.
If we could find a longer term tracker, would the project be less risky?

ViolaLass

Having an interest-only mortgage or a repayment one is not the point when looking at yield. £1100 a month on £270k is a yield of 4.9%. Wouldn't tempt me, personally.

blue_eyes777

I agree that the yield is low. Our primary aim, though is long-term capital gains - rather than rental yield.
IF, and this is a big IF, property prices in this area do follow the projected course, then the the increase in the market prices of these two properties in 5-6 years could be £87,500 and £67,500 pounds. Of course, we would have to offset that against the SD and arrangement fees, but that second property could still realize a capital gain of £50k after 5 years.

holly_hobby

You'll also have CGT issues to content with on a chargeable event (generally disposal), which will further impact on the actual net gain.

My advice would be to discuss your requirements with an IFA (preferably chartered), whom will look at your personal and financial situ, and risk profile compared to your objectives and noted constraints .... if you're saving for retirement, there will be more tax efficient ways to do this.

holly x