Slightly unusual mortgage plan - advice needed

martin0642

Hi all; I'm hoping I can get some pointers from the good folk of MS, but it's worth pointing out I will also be talking to a couple of independent mortgage brokers....just in case that's anyone's first piece of advice


So - situation is:
I bought a flat for £109,950 using inheritance money - no mortgage.
Flat is now worth around £125-130000.
I have just moved home for work, I still own the flat (currently empty) and am renting a house in the new town.
I was out of work for some time and accumulated quite a bit of debt, plus I now have impending dental implant bills which will add quite a bit more.
Originally I planned to rent the flat out - but this is now not financially viable. My work contract only lasts one year...I need to clear my debts before then because I will either end up unemployed again - or going on to a PhD - either way a huge salary cut.

So - two options to generate the money I need:
1. Sell the flat, pay everything off, put the lion's share in high yield bonds of some kind - carry on........
2. Get a mortgage on the flat for somewhere around one years salary, pay off debts, rent the flat out and use rental to cover mortgage.

Option 2 seems the most sensible one; but.......and I guess this is where advice comes in handy...

a. Will my relatively short term contract matter? (It's actually two back-to-back six month projects and work will not confirm me starting the second one until it happens)

b. Would the mortgage count as some form of "buy to let" (even though I already own the property) and what are the potential tax/cost implications given recent and upcoming changes to taxes etc.

Finally..........any other thoughts on a good way to proceed here?

silvercar

If you are letting the property, you will need a buy-to-let mortgage on it. I suspect you will struggle to get a BTL mortgage without owning the property where you live.

foxy-stoat

Sell it and get the money out.

If this is your only property and you do get a BTL mortgage you will be a Landlord but working for the lender and HMRC also.

ACG

Not living in your own property will not be a deal breaker on a BTL Mortgage, neither will the contract. The 2 combined might be a bit tricky but can be overcome - providing the rent stacks up, which on the size of Mortgage you are looking for, I am sure it will.

As to which is the better option, I think a lot will depend on what your plans are, the rent received and whether you want an easy life or potentially a headache.

The rent you will receive will be taxed. If the rent you receive in conjunction with any income you earn takes you over the £40-45k higher rate tax threshold then you will be paying 40% tax at some point.

What will you do if there is a problem in the flat and you end up with a bill for a grand or 2? Boiler breaking or a leak for example? With no income, that could be a costly problem.

What happens if you get a tenant who stops paying and you need to go through the eviction process? Is that a headache you want whilst studying?

As a landlord, you are a business. The person living in the property is a consumer and so they have far more rights than you do. The property you are renting out is/was your home. There is an emotional attachment that the tenant may not have.

I have been a landlord and I would never do it again. I know there are many good tenants out there, but my experience is they do not look after your home. One tenant burnt the carpet (one that had been fitted a day before he moved in) and denied burning it. It was there when he moved in. Why I would have an iron in an empty property is beyond me and eventually he backed down. He owned his own home but had to move out whilst works were being carried out. His insurance company paid for 6 months rent upfront.

Another grew cannabis in the cellar and took a few bricks out for good measure, did the worst job at painting a wall I have ever seen, replaced the carpet with laminate (without asking or laying it properly). Left a load of rubbish and owing a months rent. She was a secretary at a solicitors and had 2 young kids...

martin0642

Wow - wasn't expecting replies quite this quickly! Thank you all for your input. As you can imagine I've had several viewpoints so far on the best course of action.

I'll add some detail in light of responses (especially ACG's..thank you).

Proposed mortgage amount would be around £30,000
Typical rental in my apartment building is around £750 pcm

Adding that rental income to my salary would not take me over the £40k limit, but it would be close and I do get the option of other smaller income streams during the year that could, together, add up to that higher bracket.

ACG - I hear you on the easy life vs potential headache debate. After the past year in particular, an easy life is definitely a preferable option. Especially given the fact my life circumstances absolutely will change some time in the next 11 months and, unless I find another job in my, quite niche field, is going to mean a significant drop in income regardless of what happens.

I calculated £30k in order to provide a buffer for some eventualities; but that's taking a bit of a stab in the dark at what those eventualities may be and how much they may cost to rectify...and without factoring in having to remove a tenant (although I suspect that's rare...it is a point worth considering).

I look forward to any more input; but so far the weight of opinion seems to lean towards selling, with good reason.

sal_III

Can't you just sell the flat, pay off your debt and use the rest as a deposit on something locally with a small mortgage perhaps? Long term mortgage at decent LTV is going to be far cheaper than rent.

martin0642

sal_III wrote: »

Can't you just sell the flat, pay off your debt and use the rest as a deposit on something locally with a small mortgage perhaps? Long term mortgage at decent LTV is going to be far cheaper than rent.

That is another option....and probably my long term plan. Right now I can only deal with what I'm sure of - I definitely have the rest of my 6 month contract; it's 95% certain I have the second one. I have a lot of debts to get rid of.

Everything beyond that (including where I might be living in a year's time) is debatable at this stage.

But yes - that was broadly the thinking behind my plan to put the lion's share into a bond (or other savings option I can't access for a year) so I then have the option of a deposit or re-investing it (or taking the money and running away to foreign climes........). I just wanted to explore other options that maybe didn't involve losing the asset.

sal_III

Generally, any scenario where you let out one property and use the proceeds to pay rent on another property where you live is ill advised. So much things can go wrong and all the stress of being a LL, is rarely worth it.

martin0642

sal_III wrote: »

Generally, any scenario where you let out one property and use the proceeds to pay rent on another property where you live is ill advised. So much things can go wrong and all the stress of being a LL, is rarely worth it.

No that wasn't my plan - rent for my current place would be paid via work income. The rental from my flat would be used to pay the mortgage on that flat.

However....I am most definitely getting the idea that it is probably significantly more hassle than it would be worth and potentially leave me in a very difficult position.

enthusiasticsaver

I would sell it. Renting property out is no where near as lucrative. You have to pay tax on the rent, a buy to let mortgage would be needed as you do not live there which is more expensive than a normal mortgage and with a fixed term contract I am not sure you will get one. What happens if you struggle to rent it out or you get tenants who don't pay?

martin0642

enthusiasticsaver wrote: »

I would sell it. Renting property out is no where near as lucrative. You have to pay tax on the rent, a buy to let mortgage would be needed as you do not live there which is more expensive than a normal mortgage and with a fixed term contract I am not sure you will get one. What happens if you struggle to rent it out or you get tenants who don't pay?

Yes I'm certainly getting the impression it's a foolhardy plan

Essentially - it was in an effort to try and hold on to the asset. No savings option will give me the financial return of another year of house price rises (and yes...I appreciate in these uncertain times that's not guaranteed). However....given the circumstances...it makes sense to sell, pay things off, start with a clean slate and very healthy bank deposit for later use.