Buy-to-let finance query

mountaindog

I have virtually no pension to look forward to but have equity in my house and a small amount of savings (under 30K). I am proposing to buy an apartment and my IFA who I have only just met advises me to borrow all the money on my house enabling me to purchase the apartment outright. I have researched this a little and he assures me that doing it this way is as tax efficient as purchasing the apartment on a BTL mortgage. I would appreciate your views/help/suggestions as my head his hurting (a bit!!).
Thanks in anticipation.

silvercar

On the technical detail, your IFA is right. Borrowing the money to purchase a BTL would mean that the mortgage interest is an allowable expense, whether the loan is secured on your home or on the BTL property. (Though restricted to the value of the BTL property when you first let it).

As for the suggestion that you should put all your eggs in the property basket, that you should risk your relatively small amount of savings and rely on this BTL providing your pension, I think you should proceed with great caution.

mountaindog

Thanks silvercar

I appreciate your advice and I will TRY and be careful. Is their more risk using one method of finance than the other? I would like to keep my main home as ‘safe’ as possible.

silvercar

Absolute Worst case scenario: you buy a BTL, either you have difficulties finding a tenant or the tenant doesn't pay rent and trashes the place and you exhaust your savings and fall behind on your mortgage payments. Add to that the property going down in value (either wrecked by tenants or falling property prices). Now you are stuck with a mortgage you can't afford and a property you can't let. You would have to sell the BTL property.

Now if the BTL mortgage was secured on the BTL property you would sell and any shortfall would have to come by borrowing against your main home. If you couldn't sell your lender could repossess the BTL but would still come after you for the shortfall and would end up placing a charge against your main property.

If the BTL mortgage was secured on your main home. You would sell the BTL and repay most of the BTL mortgage, leaving you with an increased mortgage. If you couldn't sell you would have to auction it off cheap to avoid your main home being repossessed.

So the end result would be the same - just different hoops to jump through.

This is all worst case scenario remember to help you understand risks.

Best case scenario is you get good tenants providing you with enough money to pay the mortgage. In years to come as rentals go up you start to make a profit each month or with increased house prices you sell and make a nice profit.

Without a crystal ball you expect the answer to lie somewhere between the two.

mountaindog

Thanks again silvercar!

I had realised many of the pitfalls you mention but your “laying it out on paper” like that is GREAT ! I think I have a good market for the apartment but you’re quite right about a crystal ball, boy! do I wish I had one!!
I think/hope/pray its a risk worth taking

carolt

Do be VERY CAREFUL of buying new build apartments in particular, as this is the type of property widely expected to fall first and furthest.

If you must put all your eggs in the property basket (is this wise? - those who've made a profit doing this in recent years had the advantage of good timing, buying when prices were rising; buying now, just as the property market has turned, seems a dangerous step and you risk, as silvercar has pointed out, not just failing to make a profit but actually losing your own home too) consider buying a small terraced house rather than a flat as the prices of these hold up better in a downturn and in the current market they would be easier to rent too.

Remember, your mortgage advisor is just that - a good person to advise you on mortgages. He is not an expert in the property market though and it is up to you to research widely before choosing a property to buy - or an entirely different investment. Mortgage advisors make their living selling you mortgages - it's in their interest to get you to take one out. That doesn't mean it's in your interest though - look at America, where unregulated brokers have costs hundreds of thousands of people their homes.

Good luck with your decision!

sarkin

As others have said the door to buy to let is slowly closing, those that are in are making money, but new entrants are having to work hard to break even. Where abouts in the country are you looking?

dunstonh

Appartments are already falling and the builder paying the deposit scam is largely to blame along with supply outstripping demand in many areas.

Remember, your mortgage advisor is just that - a good person to advise you on mortgages. He is not an expert in the property market though and it is up to you to research widely before choosing a property to buy - or an entirely different investment. Mortgage advisors make their living selling you mortgages - it's in their interest to get you to take one out. That doesn't mean it's in your interest though - look at America, where unregulated brokers have costs hundreds of thousands of people their homes.

The OP said it was an IFA not a mortgage broker. You would expect any decent IFA to have a greater knowledge in investment business than a mortgage broker. That said, many people use the term IFA when they arent actually seeing an IFA but a tied agent or mortgage adviser. So, there is merit in what you say. Plus, not all advisers are at the same level of skill or ability.

I would expect an IFA to have commented on the rental yield, the risks involved (borrowing to invest is a higher risk transaction and you are placing your own residential property at risk, even if the borrowing isnt put on it but the rental property).

Most of us here would be interested in the the rental yield you are getting and if the builder is paying the deposit or other incentive as well as knowing if the rental income will cover the mortgage payments.

mountaindog

Thanks to you all, once again!

The property is in Cheltenham and it’s not new. The expected rental would make us a slightly better return than say a bank but as silvercar said crystal ball time!! And yes the rental income will cover the mortgage LTV, they are only asking for an income app £370 others in the unit are charging £450. Its ex council and in very good order inside and out. 5 out of the 12 are privately owned.

The apartment is very close to GCHQ and there would be my target market, it’s bigger than average and I know someone who has one in the same unit and they have had no problems so far, and its let to a GCHQ bod.

Investing at this time as you all rightly say is a gamble and you have all really helped.
My IFA is that not a mortgage broker BTW and he has commented on risks.
He also thought that interest rates would possibly come down soon…..slightly, and i heard same on a radio interview last week, what are your thoughts?

dunstonh

My IFA is that not a mortgage broker BTW and he has commented on risks.

IFAs are investment advisers but some also do mortgages but they the IFA classification doesn't exist for mortgage business. When they do mortgages, they have their mortgage adviser hat on and work under different rules to that when they have their IFA hat on. (FSA love to keep things simple!!!)

He also thought that interest rates would possibly come down soon…..slightly, and i heard same on a radio interview last week, what are your thoughts?

Possibly. Its hard to tell at the moment. Yesterdays increase in inflation shows that there is still the potential for an increase. If it wasn't for the credit crunch you could bet your life that the next rate change would be upwards.

The property is in Cheltenham and it’s not new. The expected rental would make us a slightly better return than say a bank but as silvercar said crystal ball time!! And yes the rental income will cover the mortgage LTV, they are only asking for an income app £370 others in the unit are charging £450. Its ex council and in very good order inside and out. 5 out of the 12 are privately owned.

As long as you have done your homework and understand the risks then that is all anyone can ask. Unfortunately, too many haven't and now that BTL is slowing down these are the ones that tend to suffer first.

silvercar

Ex council flat? Be very aware of the council updating the block and charging you extortionate costs for your share. With less than half of the flats privately owned, check how easy a mortgage would be to source. Not just for you, who can secure the funds on your home but for prospective buyers when you sell.