Is this a good investment? (Mortgage related)

jumperabv3

I will try to explain it briefly as much as I can:

1) Bought a property in London outright (without a mortgage) for £400k in 2012.

2) Been renting this property as a BTL since then, thankfully had good tenants, always paid rent on time, never had major issues, using letting agency for full management + rent guarantee (if the tenant doesn't pay the letting agent would cover it + legal costs).

3) Rent after taxes, service charge etc. - net is around £1,400/month.

4) Considering now investing in a 2nd BTL, don't have enough capital for it, requested a mortgage for £250k - there is a property I found with 5% yield (before expenses) which costs £225k - this one is not in London but it looks like a good investment.

5) Applied for a remortgage (aka equity release) against the current property I own a few days ago, submitted all docs - today I've received an approval subject to valuation which should be carried out next week.

6) According to Zoopla the property I purchased for £400k in 2012 should worth now around £700k, it's clean and tidy, looks nice, tenants are wonderful people, taking very good care of it ... 

7) My mortgage amount is for £250k (to cover £225k property price + stamp duty £9k approx + any other expenses + possible statutory lease extension for the current property I want to remortgage - posted a thread about not a while ago in the forum, the property has 250 years from 2012 so plenty of time until then but I just don't like the ground rent increase every 20 years).

8) The remortgage product I applied for can give up to 60% remortgage of property value, let's say the property is worth only £500k (which is totally impossible, it must be worth more now since 2012 but I'm a person who loves hypothetical scenarios) - 60% of it is £300k, I'm only asking £250k.

9) Okay now comes the million dollar question.

The property I want to buy is currently paying in similar flats £995/month (let's round it to £1k per month).
Mortgage I applied for is for 20 years.
Remortgage rate is 1.70% for 5 years, fixed ... I'd rather take it fixed for piece of mind. Can pay 10% overpayment each of the first 5 years of the remortgage.
I've calculated this as follows:

1) Current rent £1,400/month - I'm getting along in life without this rent, so I can pay 100% of this rent towards the remortgage.

2) If the 2nd BTL will yield £1000/month I'd say after taxes, service charges etc. - let's take a worse case scenario I'd be left with £850/month - it's supposedly "guaranteed" (i.e. even if the tenants don't pay, the letting agency has to pay).

3) For 20 years I am supposed to repay £1,200/month, approx. I want to repay it much quicker.

4) Assuming I will use rent from both properties to pay them both to the (re)mortgage it would be around £2,250/month after all taxes, charges etc. This is around £27,000/year and I hopefully think I could even add extra £3,000 per year out of my own pocket i.e. pay £30k/year towards the (re)mortgage.

5) This means that after 5 years around £150,000 can be paid towards the (re)mortgage, I am looking to pay the remortgage as repayment of both capital + interest (1.7% fixed for 5 years).

6) Then hopefully looking after 5 years to finish the mortgage within 4-5 years (9-10 years in total).

How does this scenario look? I know things can always change along the way, and even the next 5 years can be unpredictable - however assuming things stand the way they are now - that's the scenario I can foresee more or less for now .... does it look like a good investment overall? If you were in my shoes would you move forward with it?

Whats_your_forte

Looks fine

Sounds like all worked out on a spreadsheet. Issue you may have is the level of debt you can pay off ie the 10% allowance on a quickly decreasing mortgage ie you could trigger penalties towards the end of the 5 year fixed. You therefore have to think whether putting extra money into the mortgage and paying a penalty versus keeping it out of the mortgage and see if you can get 1.70% elsewhere pending the expiry of your deal.

At that level of overpayment, would a deal with no repayment limits work better??

Thrugelmir

You do realise that the interest you'll be able to offset against the new property will be restricted to the purchase price paid. Not the amount that you borrow. Likewise if you a high rate taxpayer (or become one as the net rental income grows) then the relief given will be restricted to 20% on interest paid. 

jumperabv3

Whats_your_forte said:

Looks fine

Sounds like all worked out on a spreadsheet. Issue you may have is the level of debt you can pay off ie the 10% allowance on a quickly decreasing mortgage ie you could trigger penalties towards the end of the 5 year fixed. You therefore have to think whether putting extra money into the mortgage and paying a penalty versus keeping it out of the mortgage and see if you can get 1.70% elsewhere pending the expiry of your deal.

At that level of overpayment, would a deal with no repayment limits work better??

Well, the overpayment is 10% of the balance and it's capped at maximum amount of £12k penalty for the entire mortgage, however 10% overpayment (i.e. over the monthly £1.2k) is about £2k - even with the rent from both properties I won't hit that 10%. I've calculated it. (This is around £3,200/month - anything above it carries penalty, I don't see myself paying over £3,200/month - no, that would be impossible for me the way I see things now).

jumperabv3

Thrugelmir said:

You do realise that the interest you'll be able to offset against the new property will be restricted to the purchase price paid. Not the amount that you borrow. Likewise if you a high rate taxpayer (or become one as the net rental income grows) then the relief given will be restricted to 20% on interest paid. 

I took taxes into consideration, it's all considered, I'm happy with the amount of tax to pay, there is no issue with that. Yes ... the interest is offset to £225k, not £250k - overall I see the difference of £25k - 20% of that difference that I can't offset for tax purposes is okay for me.
But just to clarify the interest on the stamp duty (e.g. price is £225k but with stamp duty it's £234k) - this one doesn't count for tax purposes? Just good to know this in advance.

jumperabv3

By the way would you use the same solicitor for the purchase of the 2nd BTL (or for the mortgage - this one is provided by the bank) - would you use him also for the statutory lease extension or it makes no difference? i.e. if I use a solicitor for several products would it make the price cheaper or that's irrelevant?

Whats_your_forte

jumperabv3 said:

Whats_your_forte said:

Looks fine

Sounds like all worked out on a spreadsheet. Issue you may have is the level of debt you can pay off ie the 10% allowance on a quickly decreasing mortgage ie you could trigger penalties towards the end of the 5 year fixed. You therefore have to think whether putting extra money into the mortgage and paying a penalty versus keeping it out of the mortgage and see if you can get 1.70% elsewhere pending the expiry of your deal.

At that level of overpayment, would a deal with no repayment limits work better??

Well, the overpayment is 10% of the balance and it's capped at maximum amount of £12k penalty for the entire mortgage, however 10% overpayment (i.e. over the monthly £1.2k) is about £2k - even with the rent from both properties I won't hit that 10%. I've calculated it. (This is around £3,200/month - anything above it carries penalty, I don't see myself paying over £3,200/month - no, that would be impossible for me the way I see things now).

10% on a decreasing balance? Most will use the balance as per either the start of the calendar year on the annual anniversary - not the original amount borrowed. Admittedly, the issues won't be till year say 4 or 5.

jumperabv3

WYF, yes, you are correct, it's 10% over the monthly payment but in regards to the remaining balance - but again, this is not an issue ... first year it's around anything above £3,200/month, 2nd year it's anything over £3k/month ... yes, like you mentioned, won't be any issue before 5 years have elapsed (and if it would be I'd regard it as small potatoes as it means things are okay).

Whats_your_forte

Then crack on!! 

jumperabv3

Whats_your_forte said:

Then crack on!! 

Thanks! I had a question above about the solicitor (if using 1 solicitor for multiple products - e.g. buying a property, ground rent removal etc. is it better than using a solicitor for each?) - would appreciate your feedback about this as well, thanks.

Whats_your_forte

A solicitor dealing with leases will be more expensive than one dealing with the purchase and/or remortgage. The latter can be dealt with by a factory firm but a more establish firm would be needed for the lease