Use of rental income / house as collateral

smiler247

As mentioned in my previous posts, I have recently inherited my late mum's home, which I intend to let. It is worth approximately 100k and is mortgage free. My own home is mortgaged - currently worth about 140k with approx 100k mortgage left.

I know the obvious answer may be to sell the inherited property and use the money to pay off my own mortgage...but I don't want to sell it, I would rather keep it and let it out.

My question is this: My husband and I would like to move to a bigger house in the future. Is it possible for the inherited property to be taken into account when we apply to remortgage? Or, is it worth taking out a mortgage on the inherited property and using that to put towards the new home?

Also, considering I already have one mortgage would that not go against me applying for another, or would it be ok providing I can prove that the costs would be covered by the rent?

I hope this makes sense.

Thank you for your time.

princeofpounds

You can do this, and you guess it right; you would take a mortgage out against the inherited property you now wholly own.

You would need a BTL mortgage, which typically requires a slightly lower LTV than a residential one and requires a certain coverage of payments by estimated rental income.

AlexMac

and an advantage of 'prince's' suggestion is that the interest on the BTL loan would be wholly tax-deductible in that you'd deduct this, and other annual expenses (such as agency fees, insurance, maintenance or management costs, etc) from the rent income and only pay tax on the 'profit'.

Good luck, and sympathies on the loss of your mum

kidmugsy

smiler247 wrote: »

I have recently inherited my late mum's home, which I intend to let....
I know the obvious answer may be to sell the inherited property and use the money to pay off my own mortgage...but I don't want to sell it, I would rather keep it and let it out.

My question is this: My husband and I would like to move to a bigger house in the future.....

Even if you want to be in the BTL business, why with that house? Might it not be more convenient to buy a BTL near the bigger house you expect to buy? Would it not be more convenient to have plenty of cash available while you are house-hunting?

smiler247

My mum's house is near to where we would like to buy, and I don't want to sell it as it was my childhood home.

claire111

AlexMac wrote: »

and an advantage of 'prince's' suggestion is that the interest on the BTL loan would be wholly tax-deductible in that you'd deduct this, and other annual expenses (such as agency fees, insurance, maintenance or management costs, etc) from the rent income and only pay tax on the 'profit'.

Good luck, and sympathies on the loss of your mum

I'm no expert but I am not sure that the interest from the buy to let mortgage can be deducted - if the funds from the mortgage are used to purchase a home that the OP intends to live in .....

You and anyone else reading this thread would need to check this out.

mgarl10024

smiler247 wrote: »

I don't want to sell it as it was my childhood home.

My only concern is whether you will be able to remain emotionally detached enough.

We've recently moved, and have let out our old house. I know for the first few months it was really weird seeing other people in "our" home, and their furniture etc. I know that I had to really work hard to detach myself from the property and to acknowledge that it wasn't my home anymore - and was a business property instead with tenants in it who need their right to quiet enjoyment respected.

For example - how would you feel if you ended up with a bad tenant that trashed the place?

mgarl10024

claire111 wrote: »

I'm no expert but I am not sure that the interest from the buy to let mortgage can be deducted - if the funds from the mortgage are used to purchase a home that the OP intends to live in .....

You and anyone else reading this thread would need to check this out.

The interest on the buy-to-let (well, let-to-buy really) property, i.e. her inherited house, would be a 'cost of the business' and as such could be paid for directly using the rent - no tax involved - regardless of what was done with the funds from the mortgage.

What the OP did with the funds afterwards does not have a bearing on the tax situation, as far as I know.

smiler247

Mgarl, it is a far point that you're making, and some of my family members and friends think the same. In between a rock and a hard place... but my thinking is that at least if I let it I still own it, whereas if it's sold there's not much chance of me getting it back.

I'm obviously very new to all of this, and intend to use a letting agent to manage the property, so that will hopefully enable the detachment that the business as it were will require.

I am after all the help and advice that I am able to find!

booksurr

claire111 wrote: »

I'm no expert but I am not sure that the interest from the buy to let mortgage can be deducted - if the funds from the mortgage are used to purchase a home that the OP intends to live in .....

You and anyone else reading this thread would need to check this out.

you are incorrect - HMRC class this as withdrawing capital from the business and therefore the interest charged on the loan created by the withdrawal is eligible
example 3: http://www.hmrc.gov.uk/manuals/bimmanual/bim45700.htm

booksurr

mgarl10024 wrote: »

The interest on the buy-to-let (well, let-to-buy really) property, i.e. her inherited house, would be a 'cost of the business' and as such could be paid for directly using the rent - no tax involved - regardless of what was done with the funds from the mortgage..

:huh::huh:
the inherited property is to be let out to generate rental income
Income tax is due on that income after deduction of eligible costs leaving the net taxable profit for the rental business

you cannot "pay the interest cost directly with the rent " and not pay tax on the rent , that is a very clunky way of expressing how taxable net profit works,

yes the interest charge may well equal the rent received, but in that case it is the net profit which is zero and so no tax is due (and from a business point of view is a silly business position to be in).

If the interest charge and all other costs are more than the taxable net profit (ie the net profit is -ve) then a loss is created and can be carried forward to offset against future years when profits are made (a loss cannot be offset against PAYE tax before you ask!)