Raising Capital To Buy a Property

Ianh84c

Hi all

I have what may sound a fairly simplistic question:

I own my own home outright, valued at 120k. I am looking at the possibility of buying another property to rent out, in the hope that the rental income will cover the mortgage expense and ideally a little on top for additional income. What is the best way to go about doing this please? Should I get a loan secured against my property? Or is there a better/easier way to raise the money to invest?

Many thanks

G_M

Residential mortgages are about the cheapest loans you can get, so yes, raise it against your home.

Obviously you'll need to satisfy the lender's requirements on your income (planned future rent will not count!), and on the value of the property.

The alternative is a (more expensive) Buy To Let mortgage on the new property you rent out.

You can offset the interest you pay on the mortgage against the rental income for tax purposes.

see also:

* New landlords: advice, information & links

* Letting agents: how should a landlord select or sack?

kinger101

If you're a higher rate tax payer, you'd probably be better off releasing some equity from your current home, and using this to obtain a BTL mortgage. The reason being, the interest on BTL mortgages is a tax deductable expense. However, this relief will gradually be reduced to basic tax rate of 20%.

See:

http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11730759/This-is-how-investors-will-beat-the-latest-buy-to-let-crackdown.html

and

http://www.mortgagesforbusiness.co.uk/news-insight/2015/july/how-the-restriction-of-relief-on-btl-mortgage-interest-will-affect-landlords/

So one thing to consider is whether you want to set up a Ltd Company that owns the properties, especially given the rules that will soon allow £5,000 of dividends tax free (but no more). It's best to decide on this from the outset, as transferring a property from yourself to a company triggers CGT and SDLT.

As for mortgages, work out what combination gives you the best in terms of rates/interest relief. I think with BTL mortgages, you typically need at least 60% equity to get a decent rate.

NB: The rent will probably need to cover 125% of mortgage repayments if you want a BTL mortgage.

booksurr

kinger101 wrote: »

If you're a higher rate tax payer, you'd probably be better off releasing some equity from your current home, and using this to obtain a BTL mortgage. The reason being, the interest on BTL mortgages is a tax deductable expense.

so is the interest on a residential mortgage provided the borrowed funds are used to purchase a rental property. I do not see any distinction between BTL mortgage or residential mortgage re tax relief