Going buy to let: "So Sir, what's your strategy for paying back the capital?"

pph · 14 April 2017 at 5:53PM

Hi again.

Me and my significant other are moving to another city, leaving where we own on an interest only mortgage and using the margin between our new mortgage payment (much lower than out current capital repayment residential mortgage) to offset the cost of renting in a new place in the town we are moving to.

(We have checked with the bank and it's fine to transfer the residential mortgage into a buy to let. We're also aware that if/when we come to sell we'll need to pay capital gains tax. Am also aware we'd need to declare the rent as earnings.)

We are going for our meeting with the bank to make the mortgage application to switch to a buy to let where we currently live. They have asked me what our repayment strategy is - i.e. if we go for a 25 year mortgage and not pay back any of the principal of the loan during that term, what will we do in 25 years? These are the options I can think of:

1) I have assumed that a 2 bed property in zone 2/3 North West London will appreciate in value by an average of 3% p/a over the term of the buy to let mortgage (25 years). But we would plan to sell the place in year 20 and the selling price would be 4 times the value of the mortgage left. Is assuming 3% rise in value going to sound reasonable?

2) I have calculated the value of my own pension in 20 years (just adding mine and my employer's contribution, no growth) - my g/f hasn't got a pension. The total value of all my pension in 20 years from now will be pretty much bang on the amount of of loan we own the bank. I am 38 now so in 20 years under changes in pension law I should be able to start taking it out and pay back the bank what's owed to them (even if I need to do it over 5 years), then sell the house and keep all the proceedings (or carry on renting it out and that will be my pension).

Are these two strategies sounding reasonable to the MSE community?

Ideally, we would save the margin we earn between the buy to let mortgage and the amount we would let the place in London for in a high interest account but we need that money as we are both taking a big step down in salary moving away from London.

glosoli · 14 April 2017 at 6:26PM

It's a buy to let, if worst comes to worst can't you just say sale of the buy to let itself? It's what 9/10 people say in my experience of processing buy to lets. No need to over complicate the matter.