To sell or to let - dilemma

mistywillow

[FONT=&quot]If anyone could help me get some clarity on this, I would really appreciate it, as I am going round in circles at the moment.

A bit of background - our current property is valued at £200k. We pay around £500 a month mortgage on the £85k we still owe on this property.
We need to move to bigger house – which will probably be around the £250k mark

We have two options.

Option 1
If we simply sell up and move on, the mortgage on the new house would be around £750-£800 a month

Option 2
We could rent out the current property for £800 a month. It is in a desirable area, and the letting agents think it would be easy to let, and would attract good tenants.

To do this AND buy a new property, our mortgage repayments would total £1400 a month.

If the house is let out, this is offset by the rent – we assume £600-700 after fees and all other costs (no idea whether this is realistic or not at the moment)

So in an ideal world, with tenants who pay their rent on time and in full each month, we could be paying around £800-900 a month for TWO properties, which would provide us with a long-term investment for our retirement.

But during periods when the house is empty or tenants don’t pay, we would be liable for the full £1400. (We do have savings that could be used as a safety net in this situation). And of course, there are other risks to consider – the future of the housing market, interest rates etc.

Which option do you think should we go for? And are there any further risks we need to think about? For info, mortgages in both scenarios are fixed term for 4-5 years. [/FONT][FONT=&quot]

The income we have to play with is around £1500 after essential spending (not including the mortgage.). This does not take into account my income, as I will be on maternity leave soon and even when back, childcare will eat up much of my salary.

Any advice appreciated - sorry for the epic post.
[/FONT]

Tryingtomoveout

Hi

I should say that I have no experience here although this is something I wish to do further down the line - Option two, that is.

If you let the estate agent manage the let this will slightly reduce your income but it also means is unlikely that your flat would ever go more than a month without income... Which means that so long as you have around a 3 months safety net..it should be ok...and the longer you can sustain it, the less your payments are going to be anyway..

I think it's probably something you need to look into further before deciding finally - such as considering the tax that will be due on buying an extra home, and other potential additional costs.

I would be really interested to hear from any other respondants who have had experience of this, too

penguine

We own a house and we also have a rental property, a flat which we used to live in ourselves, which has been continuously let for just over 3 years.

Some things you should consider:

As this property used to be your home, can you detach yourself from it emotionally if someone else is living in it so as not to regard it as your home any longer but theirs?

Do you have funds available to cover not just void periods but also emergency repairs and other unexpected expenses?

Are you prepared to do all the necessary research into the responsibilities of a landlord and to regard it as a business, one which you run in a professional manner?

mistywillow

Thank you - some interesting points for us to consider.
We do have over £30k of savings we could use as a safety net, although obviously we would prefer not to run these down too much.
We obviously need to do some detailed number crunching on tax and other expenses before making a decision.

Kevie192

Can you afford to buy the other house without selling your existing one?

Unless you have very high earnings, you'll struggle to get a second mortgage with the current one intact and you will really struggle to get a BTL mortgage on the current property without owning another house too.

nubbins

Kevie192 wrote: »

Can you afford to buy the other house without selling your existing one?

Unless you have very high earnings, you'll struggle to get a second mortgage with the current one intact and you will really struggle to get a BTL mortgage on the current property without owning another house too.

I doubt they will struggle at all. Most criteria is to earn at least 25k and if the worst came to the worst they could get a consent to let (if the lender allowed it) and get a new residential. Or most likely any new resi mortgage would have a condition that the former property is sold or let out. I am sure a broker could do this easily, they did for me.

mistywillow

We have had advice from a friend working in the field who says that getting the mortgages should not be a problem - there is a degree of complexity involved in how it would be handled, but he does not foresee any difficulties.

Ma77hew

You also have tax implications, assuming you are on a repayment mortgage only interest can be netted off against the income for Tax, so say you expect £600 a month, £500 mortgage if only £300 of the mortgage is interest then your taxable income is £300.

An alternative might be to remortgage the existing house using BTL, freeing up some of the equity to make your residential mortgage smaller. This increases the interest on the BTL and therefore your Taxable income reduces but it should also reduce the interest on the residential one. Ultimately ending up in the same position overall by moving the mortgages around you have a reduced tax liability. It may mean you have to switch the BTL to interest only though as rent I think needs to be 1.25x mortgage payment. But as long as you end up paying more off the residential to compensate ie choose a shorter term it should end up netting out.

duchy

£800 a month for a "desirable property" seems very reasonable-so presumably a one bedroom flat ?

Things to consider

Cost of landlords insurance
voids
major repairs- roof, boiler etc

If you do get a bad tenant eviction can take months (without rent and with legal costs)

Maybe cost the worst possible scenario and decide if you would put that level of your savings into a high risk investment. If you would then it may be the right decision to rent.

Every landlord has a horror story eventually (to be fair so do most tenants ) a bit of research on what *can* happen may help you decide if the risk is acceptable in your particular circumstances.

Daniel54

mistywillow wrote: »

[FONT=&quot]Option 1[/FONT]
[FONT=&quot]If we simply sell up and move on, the mortgage on the new house would be around £750-£800 a month[/FONT]


[FONT=&quot]So in an ideal world, with tenants who pay their rent on time and in full each month, we could be paying around £800-900 a month for TWO properties, which would provide us with a long-term investment for our retirement. [/FONT]

[FONT=&quot]But during periods when the house is empty or tenants don’t pay, we would be liable for the full £1400.[/FONT]
[FONT=&quot]The income we have to play with is around £1500 after essential spending (not including the mortgage.). This does not take into account my income, as I will be on maternity leave soon and even when back, childcare will eat up much of my salary. [/FONT]

A few comments/thoughts

You have £115k in equity.In option 1 this would leave a mortgage of £135k at an LTV of 46%.You appear to be overestimating the mortgage costs,as a quick google suggests for a 4/5 year fix the cost of a repayment mortgage for this is currently around £600 per month

If you leave £50k in the let property,then your borrowing costs will be greater.So a mortgage of £185k and a LTV of 26% suggest monthly repayments of circa £850 per month ie £250 per month more

For the let property,interest only on £150k is about £550 per month ,so the total mortgage costs for option 2 seem correct at around £1400 per month

Don't forget you will pay income tax on the rent,after deductions, which includes the interest on the BTL mortgage and other allowable expenses.Would you aim to pay down the BTL mortgage from profits,so you have an assset for retirement ?


If you had £50k in your bank account ,would you buy your current house as a BTL ? It's worth thinking about the opportunity cost ie what else you could do with £50k lump sum and the 3250 per month aditional you will be paying on your residential mortgage

If you want to save more for retirement,then you could take that £50k and put it into your pensions.Tax relief grows that to £62.5k immediately.Given the average long term compund return of the UK stockmarket of 5% after inflation,in 25 years that could grow to £217,500 in todays terms

Monthly savings of £250 a month into an S&S ISA might achieve just under £150,000 in 25 years time,using the same assumptions

Or you could simply buy a nicer and bigger home for £300k,safe in the knowledge that the capital gain would never be subject to CGT.

You have /will have a young family .Congratulations.Certainly a time of life where one makes long term plans and accepts long term commitments.In this context,having a rental property could well be a profitable,albeit risky ,investment.

Maybe it's a generational thing ,but to me, having mortgage commitments of £335k seems an awful lot ( and quite a potential burden) at this point in your lives.

Good luck whatever you choose to do