BTL - mortgage or not?

krishna

We are buying another house to live in (cash, no mortgage). We are going to let our existing house. We will need some mortgage on our existing property to help fund a bit of work to prepare the house for letting and also to pay for some of the work we want to do on the new place.

People I know say it is best to have some mortgage on a BTL property otherwise you end up paying a lot in tax. On the other hand, we will of course have to pay interest on the mortgage.

How do I work out the relative merits of small mortgage, bigger mortgage or no mortgage.

We have no other BTL properties, no mortgage at present, no other debts. In come from salaried employment is small. I am also self employed for which I am just about to start making a small profit.

Probably not enough info here, but happy to provide more as needed.

homer_j_3

I think, well I know, that if you intend to let the property out then you should have the mortgage on a BTL basis. The main reason is not for tax purposes but because it is fraud to take out a residential mortgage knowing that you are going to let it out almost immediately.

The BTL mortgage will have one main advantage and that is - your income does not have to be considered with some lenders there for is irrelevant. As long as the rental income covers the mortgage then it should be no problems.

How much is the property worth and what amount do you intend to borrow for the works to be done?

krishna

The mortgage WOULD be a BTL. We have in fact applied for an Abbey BTL fixed for 3 years at 6.6%.

My question was not so much about which type of mortgage, but about whether to have any mortgage on it at all and if so how much. We have applied for 100k. Property worth around £300k. Expecting to get around 1k a month in rent.

However the house we found is cheaper than we had budgeted on. In order to sort out the both houses as we want, we will probably need around £40k. That could come from the mortgage on the existing property (which will be let), or we could reduce the mortgage and just take it over time from any lettings or other income. There is clearly a convenience to doing things now, which means mortgage. I'm just trying to work out, financially, which is best.

We have borrowed some money from family to help with cash purchase, but there is no urgency to pay that back. However, if we increased the mortgage we could do so. Someone suggested to me that we should have an 80k mortgage. I don't quite see the logic in that, though it would enable us to give some of the family money back and presumably if we offset the interest against the rent for tax purposes we end up pay very little tax. Also we are going to have to pull out all our ISA funds to put into the purchase, unless we keep that and take the money from the mortgage.

So, any ideas how I work out the financial effect of these different options? Of course may be I'm asking in the wrong forum!

Leighthal

I would try to avoid pulling money out of your ISA.Whats the rate on your ISA?

Gorgeous_George

You could get a better rate on a residential mortgage so it may be better to mortgage the new house rather than the BTL property.

You could still claim tax relief against rental income, as it is the purpose of the loan and not the property on which the loan that is secured (thanks to silvercar for that little gem). Of course, you may wish yo confirm this in writing with HMRC before going down this route.

That said. my BTL mortgage is BR+ 0.89% (NatWest) and my residential is BR+ 0.74% (Britannia) so not a huge difference.

I'd borrow as much as possible to gain the maximum tax break and then invest any monies that are left over in the highest yielding accounts that you can find.



GG

Lizzy

Gorgeous_George wrote: »

You could get a better rate on a residential mortgage so it may be better to mortgage the new house rather than the BTL property.

You could still claim tax relief against rental income, as it is the purpose of the loan and not the property on which the loan that is secured (thanks to silvercar for that little gem). Of course, you may wish yo confirm this in writing with HMRC before going down this route.

That said. my BTL mortgage is BR+ 0.89% (NatWest) and my residential is BR+ 0.74% (Britannia) so not a huge difference.

I'd borrow as much as possible to gain the maximum tax break and then invest any monies that are left over in the highest yielding accounts that you can find.





GG

I agree with GG. Just to add, make sure you get BTL/landlords insurance as it is different than normal home insurance.

homer_j_3

krishna wrote: »

I am also self employed for which I am just about to start making a small profit.

Probably not enough info here, but happy to provide more as needed.

How much is a small profit? This will determine if you can follow through on CG's excellent advice. If its not sufficient then this will not be an option and my understanding of a small profit may be different to yours and wouldn't have imagined that it would be sufficient to borrow the money on the residential. However, I should not have assumed here lol!

krishna

Our joint income off salaried employment is around £26.5k. Hmm... when we first thought about it I was thinking we wouldn't have enough income to get a mortgage based on that, but at the time we thought we were going to need around 100k. So I guess we could get 3 times our joint income as a residential mortgage? So that gets us to just under 80k? Is that right?

By small profit I mean probably around £2k-£3k, though I may be lucky and get 5k. But I wouldnt be able to use that for mortgage application purposes as it will happen in this tax year.

The ISAs. 25k at 6.21% (Kent Reliance). Plus a further 6k at Barclays (6.81%).

Several of you have said get as much mortgage as poss and invest the remainder. I'd like to understand the logic of this. We have applied for £100k BTL Mortgage. The rent should cover repayments. How does it work out tax efficient to borrow and then reinvest? Are you suggesting we keep with the 100k BTL (or if we go residential then say 80k)?

Re insurance. Where does one get BTL Landlord insurance from? Also our current household insurance is with Norwich Union and expires in October. I'll need to renew it as we are unlikely to have moved by then. Can one transfer insurance to a different property, or should we go for monthly payments this time round and then sort out an annual insurance deal after the move?

krishna

I should add that the place we are buying (as a residence) is ex-council, if that is likely to make any difference.

silvercar

alanboswells.com for landlords building insurance; they also now offer residential insurance so you could try them for that.

easiest with your home insurance is to renew then cancel the policy when you move and take a new policy on your new place.

homer_j_3

You can get 4 x joint income no problems these days.