Help with re-mortgaging and BTL calculations

Skag

I own a BTL property outright, value 330k.
I want to raise equity to fund a second BTL with interest only repayments for 15 years (capital to be paid after the property is sold at the end of the mortgage period. For the sake of the calculation, the assumption is that it will gain in value, CGT will be paid, and mortgage capital will also be repaid). Also, I haven't included duty stamp, solicitor, and other costs. Running costs are also not included, if anything they will impact the following numbers negatively.

I did the following calculations and it turns out I'd be better off not going for a second BTL. Unless my calculations are wrong?

Existing property
Value: 330k
Raise 61% equity (re-mortgage): 200k
Monthly rent: 1800
Interest: 4%
Mortgage monthly repayment: 1500
Gross income: 300
After tax income (assume 40%): 180

To be acquired
Value: 350k
Interest only mortgage of : 150k
Monthly rent: 1800
Interest: 4%
Mortgage monthly repayment (interest only): 500
Gross income: 1300
After tax income (assume 40%): 780

If we assume that I'm getting 1800 from the first one, less 40% tax I'm better off now than I would be if I acquire the second one.

Crashy_Time

Why haven`t you included the other costs you mention?

Skag

Crashy_Time wrote: »

Why haven`t you included the other costs you mention?

Because I want to assess the viability of this plan before incurring extra costs. And by the look of it, it's not even viable before the extra costs.
In other words, I don't think it's worth going to "details" if the basis is not worth it.

Cliveman_Pieman

In work so I don't have time to go through full calc, but I don't think your tax computation is correct. As a 40% tax payer, the environment for BTL has become more hostile, and mortgage interest can no longer be deducted in full. In practice for highly geared LLs (which you will become) it can make BTL very unattractive.


But yes, even your simplified calcs it does not look viable.


https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords

Skag

Cliveman_Pieman wrote: »

In work so I don't have time to go through full calc, but I don't think your tax computation is correct. As a 40% tax payer, the environment for BTL has become more hostile, and mortgage interest can no longer be deducted in full. In practice for highly geared LLs (which you will become) it can make BTL very unattractive.

If that's the case, then that only makes things even less viable.
Given that, I wonder if people still finance a BTL using remortgaging, and how they make it profitable.

Crashy_Time

Skag wrote: »

Cliveman_Pieman wrote: »

In work so I don't have time to go through full calc, but I don't think your tax computation is correct. As a 40% tax payer, the environment for BTL has become more hostile, and mortgage interest can no longer be deducted in full. In practice for highly geared LLs (which you will become) it can make BTL very unattractive.

If that's the case, then that only makes things even less viable.
Given that, I wonder if people still finance a BTL using remortgaging, and how they make it profitable.

Many people will have been caught unawares by the government tax changes for BTL, they will still be trying to work out a strategy. Many will try to sell up IMO.

nubbins

Skag wrote: »

I own a BTL property outright, value 330k.
I want to raise equity to fund a second BTL with interest only repayments for 15 years (capital to be paid after the property is sold at the end of the mortgage period. For the sake of the calculation, the assumption is that it will gain in value, CGT will be paid, and mortgage capital will also be repaid). Also, I haven't included duty stamp, solicitor, and other costs. Running costs are also not included, if anything they will impact the following numbers negatively.

I did the following calculations and it turns out I'd be better off not going for a second BTL. Unless my calculations are wrong?

Existing property
Value: 330k
Raise 61% equity (re-mortgage): 200k
Monthly rent: 1800
Interest: 4%
Mortgage monthly repayment: 1500
Gross income: 300
After tax income (assume 40%): 180

To be acquired
Value: 350k
Interest only mortgage of : 150k
Monthly rent: 1800
Interest: 4%
Mortgage monthly repayment (interest only): 500
Gross income: 1300
After tax income (assume 40%): 780

If we assume that I'm getting 1800 from the first one, less 40% tax I'm better off now than I would be if I acquire the second one.

I think you need to get yourself a broker, your interest only payments should be nearer £350 and £220 respectively. Why 4%?

nubbins

Crashy_Time wrote: »

Skag wrote: »

Many people will have been caught unawares by the government tax changes for BTL, they will still be trying to work out a strategy. Many will try to sell up IMO.

We all know about your opinion.. it doesn't count for much

Skag

nubbins wrote: »

I think you need to get yourself a broker, your interest only payments should be nearer £350 and £220 respectively. Why 4%?

BTL mortgages and re-mortgaging usually come with high interest rates. I calculated this as an average, granted a 2% initial and 4.5% after a 2-3 year period. Still that shouldn't make huge difference.

How did you come up with these numbers?

saajan_12

Your tax calcs are wrong: you only get tax relief on the interest portion of mortgage payments, not the capital repayment part (the remortgage looks like a repayment mortgage?). Also over the next 4 years the tax relief on mortgage interest will be gradually reduced from 40% to 20%.

Also you seem to be looking at it from a cash flow point of view.. don’t forget you are paying off a significant portion of the mortgage so the payments are not all lost.

Here are some rough numbers assuming 20% tax relief on the mortgage interest (it’s slightly more now, but I’m assuming this is offset by the initial stamp duty / solicitors costs).

Total rent: 3600
Net total rent: (100% - 40) * 3600 = 2160
Total mortgage interest: 4% * 200k + 4% * 150k per year = 1167 per month
Net mortgage interest (after tax): (100% - 20%) * 1167 = 933
Capital repaid on repayment mortgage = 1500 – (4% * 200k / 12) = 833

Overall ‘P&L’ = 2160 - 933 = 1227
Capital repaid = 833

So you end up with 1227 – 833 = 394 in your account but the 833 isn’t ‘lost’, it just becomes equity in your existing property.

Currently you are getting 1800 in your account without mortgage costs which is higher than the 1227 ‘profit’ if you had two properties.

saajan_12

Skag wrote: »

BTL mortgages and re-mortgaging usually come with high interest rates. I calculated this as an average, granted a 2% initial and 4.5% after a 2-3 year period. Still that shouldn't make huge difference.

Ah that makes a big difference. I would look at what initial interest rates you can actually get on a remortgage / BTL basis (usually higher than the cheap 1-2% residential rates you see advertised). I work on the assumption I can remortgage when the initial fixed rate finishes (or sell if I can’t) so I never end up on the high SVR. I would remortgage for a smaller amount, having built up saving to pay off a chunk after the fix so the term doesn’t keep extending when I remortgage. Whether this assumption is valid for you depends on
- your age at the time of remortgaging
- your rental & house purchase market
- your job security to pass affordability checks for a remortgage in 2-5 years time