Would this scenario be possible?

happy2016

My wife and I have been discussing out options when we move house. We are planning to move in next 12-18 months. We currently have around 100K equity in our current house which is valued at around 150k. We are looking to purchase a property in the region of 275k.

My wife is keen to rent out our current home and wondered if this scenario would work....

We remortgage our current house on buy to let interest only. We would need to leave 25% equity which means that we would remortgage for approx £112500. This would cost us around £200 per month. We would achieve £600 per month rent which would leave a 'surplus' of around £400 per month. (I know that some of this would be used for fees etc but lets say £400 for arguments sake)

We would use the remaining£37500 equity for the deposit on our new property ( along with some cash savings to achieve 15% deposit). The £400 surplus from the buy to let property would go towards overpaying on our new mortgage each month.


I am sure that there is more to this, which is why I am asking for advice. Could this scenario work?

We have decent savings and would keep a buffer to deal with any costs linked to the BTL property, repairs etc. We would also be able to easily cover the £200 payments if we didn't have a tenant.

amnblog

Yes, this is a fairly standard approach.

You will need to allow for an extra 3% tax on your purchase.

happy2016

amnblog wrote: »

Yes, this is a fairly standard approach.

You will need to allow for an extra 3% tax on your purchase.

Thanks for the quick reply. Would be incur any tax expenses from the 'profit' from out BTL property?

Thrugelmir

Tax would be payable on the net profit made from letting out your property. Net profit being rental income less interest, maintenance costs etc.

General observations.

A rate of just over 2% is exceptionally low for a BTL mortgage.

You will be paying stamp duty at 3% on the new home as it's a second home under the recently introduced rules.

Depending on your personal circumstances you may be impacted by the changes to the rules governing tax relief on interest granted against rental income.

Letting a property is a business. Tenants aren't always what they seem. Allowance therefore needs to be made for bad debts and voids (no tenants in situ).

amnblog

Thrugelmir wrote: »

A rate of just over 2% is exceptionally low for a BTL mortgage.

Yes, the suggested payment for the lending is far too optimistic.

Allow double this and assume the 'profit' will be in the capital growth rather than the rental.