Switch residential mortgage to buy-to-let mortgage

brubaker_2

Q: I have a residential property (apartment) mortgage and at some point in the future wish to change it to a buy to let mortgage after I have purchased a second property. The second property will then be the family home.

What is the process for doing this?

What are the implications financially, particulalrly with the new buy to let stamp duty regulations that have appeared from April 2016?

Thanks

marksoton

Well speak to your mortgage lender.

You might have to pay a redemption fee, you'll almost certainly pay the additional SDLT. They might even refuse your request.

kinger101

You will pay the additional SDLT.

AnotherJoe

The process is likely that you'll need to convince a lender that you'll be able to afford both mortgage payments without an income from rental and you'll need to pay the extra SDLT.

If the new house is much more expensive than the flat it may work out substantially cheaper to do a conventional sell flat / buy house transaction, and then buy another flat specifically for BTL.

booksurr

your personal circumstances will determine the final outcome and so only a broker can give you an exact answer. However, in principle, using the criteria currently applied, the position is:

1. Mortgage.
If the letting is intended to be long term your current lender may or may not allow you to carry on the current mortgage under Consent To Let (CTL). That may or may not entail one off fees and/or increased interest rate. If the lender refuses CTL, eg: many lenders have time limits on CTL so would not give it for a longer term let, then you will need a BTL mortgage.

A BTL is obviously obtainable from any lender in the market. Typical criteria for them being: minimum 25% equity held by you in the property (ie loan limited to 75% of its then value). You must pass the interest cover test: rental income must represent at least 125% of the mortgage cost based on a 6% interest rate. Many lenders will require you to also own a dedicated residential property so there is no risk to them you are looking to back door the purchase of a place you intended to live in, not let out. BTL loan is not related to your affordability to pay it, the loan is based on the interest cover, however some lenders will check that you have a minimum income of £25,000 nonetheless.

The mortgage on the new family home will of course be based on your affordability as it will be a residential mortgage like you currently have. The fact you have a BTL in the background would/should not affect the affordability calculation as the BTL is treated as being self financing, hence the interest rate cover test.

For that reason the rental income will typically not be included in your affordability calculation when assessing what you can borrow to fund the family home. You will therefore need a cash deposit for the new family home mortgage, as any equity in the BTL will also be ignored as it cannot be used as deposit against the new home for obvious reasons

2. SDLT. Obviously you will be required to pay SDLT at the higher rate when purchasing the new family home since you are increasing the number of properties you own, rather than merely replacing one for one. The fact the new property will be the family home is ignored since the exception relates only if you sell the family home and buy another, a thing you are patently not doing.

3. Tax. Obviously you will have to pay income tax on any profit from letting. If the let property is co-owned then the profit must be split between you, 50/50 if married to the co-owner, or whatever split you want if not married. Eventually when you sell you will be liable for CGT, but able to claim various relief given it was once your main home, so the amount payable may be zero or small depending on the values and rules in the future.

tlc678910

The amount of tax relief available on mortgage interest for buy to lets is due to be reduced for higher rate tax payers (who will no longer be able to deduct the full amount of mortgage interest as an allowable expense).

If you are a higher rate tax payer you could find you have a tax bill even if your let makes you no profit because of this. In this case you would need to pay your tax bill from your other income.

Tlc