Biting off more than I can chew

demontfort

Hello,

I'd appreciate any advice on the below as I'm looking to remortgage and also buy 2 other properties at the same time.

Property 1


Residential property in London where I currently live and will continue to live.

• Value £360k
• Mortgage £30K
• Mortgage Payment - £288pcm at £30k or £500pcm at £50k

Remortgaging right now to a 2 year fix as at the end of a 5 year fix. Aim to pay this off in the next 2-3 years.

Property 2


I am jointly buying a second residential property with my partner (offer been accepted) to stay in at weekends whilst living in Property 1 during the week.

• Cost £400k
• Mortgage £300k
• Deposit £100k from savings
• Joint Mortgage Payment - £1500pcm

My income is £96k (full time employed), her income £53K (Self Employed with two years of tax records) and my mortgage aside neither of us have any debt. Mortgage application is proceeding with no hitches.


Property 3

I like to make my life complicated so I’m considering buying a third property as a BTL nearby Property 2 at the same time. I'd like to add £20k to my remortgage on Property 1 to include in my BTL deposit. I could cover the whole deposit through savings but using the £20k remortgage cash bumps up the BTL yield.

• Cost £190k
• Mortgage £142.5k
• Deposit £47.5k (£27.5k from savings and £20k remortgage cash)
• Mortgage payment (BTL only) – approx £600pcm, rental would be about £800pcm
• Cash flow slightly negative but decent yield

I've already factored in fees, stamp duty for the two new properties etc. I’m assuming each of these applications by themselves are fine and even 1 and 2 together are fine.

• But am I likely to be accepted for the BTL mortgage?
• Would throwing the BTL mortgage application into the equation at the same time create any complications for the Property 2 mortgage application?

Thanks,

[FONT=&quot]DM[/FONT]

enthusiasticsaver

I would consider adding a third mortgage into the mix biting off more than you can chew. If the rental is £800 don't you now have to pay tax on that leaving you barely enough to cover the mortgage let alone cover maintenance or any breaks in rent?

tlc678910

Hi, you have mentioned the cash flow on the buy to let will be negative so have you already taken into account that as a higher rate taxpayer your mortgage interest is not fully deductable as an expense?

You pay tax on mortgage interest at your tax rate and receive back a 20% credit so for example if your £600 a month is interest only you include the £7,200 mortgage interest a year as income for tax and receive a 20% credit back so if you pay 40% tax that's £2880 but receive back a credit of 20% meaning you have paid £1440 tax on the mortgage interest - plus tax on what is actually profit also.

This is the reason some highly leveraged landlords of multiple properties are in hot water as they have tax to pay on no profit.

(I'm no expert - the above is just my understanding but if you are not fully aware then look into it)

Just in case I'm checking you know there is an extra 3% stamp duty to pay as you are purchasing additional properties so I have calculated the additional residential property as 22k stamp duty and the rental as 7k stamp duty.

There are so many variables that vary between lenders how they handle them on a buy to let that you really should use a broker to assess all your circumstances and advise you who to try rather than approach a particular lender.

Edit: some lenders won't allow extra borrowing on a mortgage for the purpose of buying other property so something to check with your lender re the 20k on remortgage for deposit.

demontfort

enthusiasticsaver wrote: »

I would consider adding a third mortgage into the mix biting off more than you can chew. If the rental is £800 don't you now have to pay tax on that leaving you barely enough to cover the mortgage let alone cover maintenance or any breaks in rent?

Thanks and agreed the numbers are tight. Yield after tax is just under 4.7%, cashflow including tax, voids, maintenance and, insurance is about -£200pcm, not so much of a concern to me as I have enough saved away to pay off mortgage 1 and buy the other 2 properies for cash. Doubtless the BTL lender will be concerned about cashflow though.


I'll probably look to get the second mortgage and house sorted first then increase the mortgage on Property 1 and try to sort out the BTL. Probably no hurry on the BTL as I'd expect house prices to tail off in that area in the next 12 months

demontfort

tlc678910 wrote: »

Hi, you have mentioned the cash flow on the buy to let will be negative so have you already taken into account that as a higher rate taxpayer your mortgage interest is not fully deductable as an expense?

You pay tax on mortgage interest at your tax rate and receive back a 20% credit so for example if your £600 a month is interest only you include the £7,200 mortgage interest a year as income for tax and receive a 20% credit back so if you pay 40% tax that's £2880 but receive back a credit of 20% meaning you have paid £1440 tax on the mortgage interest - plus tax on what is actually profit also.

This is the reason some highly leveraged landlords of multiple properties are in hot water as they have tax to pay on no profit.

(I'm no expert - the above is just my understanding but if you are not fully aware then look into it)

Just in case I'm checking you know there is an extra 3% stamp duty to pay as you are purchasing additional properties so I have calculated the additional residential property as 22k stamp duty and the rental as 7k stamp duty.

There are so many variables that vary between lenders how they handle them on a buy to let that you really should use a broker to assess all your circumstances and advise you who to try rather than approach a particular lender.

Edit: some lenders won't allow extra borrowing on a mortgage for the purpose of buying other property so something to check with your lender re the 20k on remortgage for deposit.

Thanks for the detailed response. Stamp duty on both properties is factored into calculations as are the tax changes on BTL interest. I've confirmed that lender on mortgage 1 would be happy to lend extra to buy a property.


Agree the tax changes though make BTL very unappealing right now but even with all of the above I can still get a half decent yield. The challenge I think would be convincing the BTL lender that I can cope with negative cashflow which is why as you said it may be worth getting a broker. I'll sort out mortgages 1 and 2 first though.

getmore4less

An increased mortgage on your 1st residential is likely to be cheaper than the BTL and will still qualify for the(limited) tax relief.

with only 5% gross yield you need any lending to be cheap as possible.

Total borrowing for BTL £163k still under 50% on house 1 should get that under 2% £270pm interest + 20% tax £324 yield is now 3% before expenses

Actually lower once you factor in all the extra buying costs.

ROI on your cash going in will be OK.

on a long term(35y) repayment that borrowing @ 2% would be £540pm

on an interest only basis it should be cash flow positive until the rates go up a lot.

With the income cashflow maybe consider an offset to keep a contingency fund available, with 3 houses and bad luck there could be a call on cash if they all have issues at the same time.

demontfort

getmore4less wrote: »

An increased mortgage on your 1st residential is likely to be cheaper than the BTL and will still qualify for the(limited) tax relief.

with only 5% gross yield you need any lending to be cheap as possible.

Total borrowing for BTL £163k still under 50% on house 1 should get that under 2% £270pm interest + 20% tax £324 yield is now 3% before expenses

Actually lower once you factor in all the extra buying costs.

ROI on your cash going in will be OK.

on a long term(35y) repayment that borrowing @ 2% would be £540pm

on an interest only basis it should be cash flow positive until the rates go up a lot.

With the income cashflow maybe consider an offset to keep a contingency fund available, with 3 houses and bad luck there could be a call on cash if they all have issues at the same time.

Thanks for the reply and advice, plenty to think about. I get a slightly different number on the yield factoing in all costs of buying and expenses but the numbers still look bordeline. Looking at the this it made me realise a couple of things:

-A fair few BTL landlords must either underpaying or not paying tax to get any kind of yield.
- Most BTL landlords must do it for the capital appreciation rather than the yield but Based on the yields I'm seeing, house prices are too high in most parts of the county to justify BTL
- It's not a business for amateurs.

dimbo61

You are trying to buy/remortgage 3 properties at once so No mean feat !
It can be done but you really need the help of a mortgage broker and tax accountant who both deal in BTL.
You can achieve a yield of 10% IF and only IF you know exactly what your doing.
S24 has changed the whole BTL market and the ability to make a profit.
You also have the disadvantage of living in the big smoke where BTL yields have in many areas been poor and Landlords have enjoyed major capital appreciation.
That bubble has burst

amnblog

The rent on the BTL is insufficient to support the Lending required on it with many Lenders.

You should get lending on it but will need the help of a good Broker, who may as well sort the other applications whilst they are at it.

silvercar

Don't forget to make a declaration to hmrc as to whether property 1 or property 2 should be your PPR. You have 2 years from initial ownership to make the choice, otherwise it will be based on the facts.

Under current tax rules there is an advantage to having some time as PPR for any property you own (and have lived in).

gatters

Will your rental income not push you into the effective 60% tax bracket above £100k? Perhaps pension contributions or a S&S ISA instead of BTL would prevent this.