First time landlord with residential mortgage - tax situation

Oliveroses

Hi, we need to relocate and do not wish to sell our house: we plan to let it. We have 2 years left on our residential mortgage and to leave it would involve extortionate costs (£10k). Once we have paid tax and agency fees we will have a shortfall of around £500 a month that we will need to make up for our mortgage payments. I’m trying to get my head around the figures at this stage.?I’ve read a lot about how the tax situation has changed and think I grasp the basics, but I have some questions about tax! And how to work out the figures for a tax return, and what’s claimable against tax.

First question is I understand there is some tax relief (20% I think) against interest on the mortgage payments. But nothing on the capital investment payments. That’s fine but how on earth do I work out 20% of my interest payments on the mortgage?

Second questions are simpler! I need to do some maintenance to prepare property for letting. These include replacing an unreliable hob with one, like for like, that will work without glitches for the tenants, and external decorating maintenance/repainting. Can I claim either of these before the let begins? If not, are they claimable after the let begins? I will do the work beforehand of course but I want to know the rules here.

Thanks so much. Please bear with me, never done this before and seems like a minefield!

silvercar

First question is I understand there is some tax relief (20% I think) against interest on the mortgage payments. But nothing on the capital investment payments. That’s fine but how on earth do I work out 20% of my interest payments on the mortgage?

Your annual mortgage statement should show it. Or look at the outstanding balance at the start of the year and the end, the difference is the capital repayments, the rest of your monthly mortgage repayments are interest.

Caz3121

have you applied for consent to let from your mortgage provider? if so, how long will they allow it for and are there additional costs?
Paying £500 per month over 2 years in shortfall will cost you £2k more than the early redemption payments (and that assumes you have no voids) read up loads on being a landlord and you may decide paying the penalty now may make more sense
start here https://forums.moneysavingexpert.com/discussion/comment/67759929#Comment_67759929

csgohan4

be careful being  a LL, it is not without it's risks. Do a business case and weigh up the overheads, the profits and see if it's worth it. 
Make sure you read on your legal and tax implications. Are you aware of the interest changes to claiming back tax, the changes to Section 21 in the future which are planned?

[Deleted User]

If you become a LL, that will cost you £12,000 plus repair costs, and what happens if the tenant doesn't pay rent for some reason?  If you sell, it will cost you the £10k early redemption fee plus estate agent/legal fees, so slightly more probably.  But is it worth all the stress and strain of applying for consent to let, paying tax, dealing with tenant problems through the LA etc etc?  Once its sold, you can just walk away and concentrate on your new life.

SpiderLegs

£500 a month shortfall seems extremely high. What’s the mortgage payment and the expected rent?
is the 10k just an ERC? Have you had this confirmed?
Presumably you are planning on renting in your new location as you haven’t mentioned an onward purchase?

SuperHan

You can deduct the new hob etc if it's a replacement of one previously provided to the tenants (i.e. if you replace it once they move in).

For interest, look at your statement and multiply by 20%, and that's the deduction you make from your tax bill (calculated without any mortgage deductions)

Markneath

Typically with a btl, the mortgage is interest only with no repayment in place, a recent example below.

House bought for 134k, 25% deposit of 33,500, 100,500 mortgage costing 163 per month Interest , the house rents for 625 per month, after all costs and tax there’s 200-250 per month income with potential for house price growth on top.
 
I know this doesn’t help you but btl are generally interest only. 

You should get a mortgage statement each year giving a break down of interest payments though.

Once you start doing repayment mortgages the figures don't stack up, its better to put the money into a deposit on the next one than a repayment mechanism. 

greatcrested

Or ask your lender for the breakdown between interest and capital repayments: they'll tell you. Then multiply by 20%!

Of course, that will alert the lender to the fact you are letting, so best get CTL first!

I agree with others - the finance makes no sense. Your losses on the letting will balance against the loss on Early Redemption and could easily exceed if, say, you have voids (budget for 10 not 12 months rent each year) or rent arears.

Take a look at some of the other threads on this forum! eg

https://forums.moneysavingexpert.com/discussion/6187399/money-claim#latest

And read

Post 7: New landlords (1):advice & information :see links in next post

Post 8: New landlords (2): Essential links for further information

Post 9: Letting agents: how should a landlord select or sack?

Oliveroses

Thank you everyone, so  much, for your comments. The more I read about renting the more stressful it sounds. I had no idea the fees or the taxes were so high until a couple of days ago.
In answer to questions, our mortgage is with Nationwide and I have made preliminary enquiries about the permission to let.  There is a form to fill out and the interest rate goes up by 1%. As they are not a buy to let lender, if we did not switch at the end of the two years we'd go onto the standard interest rate (obviously if we were in that position we would switch to a BTL mortgage provider). The £10k charge for ending the mortgage was quoted by the bank - our mortgage is quite high, around £254k, and the fee would be 4% of it.

Our mortgage repayments are £933/month; if interest went up by the 1% when/if we let, they would go to around £1,065 a month. Our property is valued to let at around £1300 a month, so after we have paid agency fees and tax (40% bracket) I believe our shortfall would be around £545/month. Obviously this is a lot and not very profitable - the only thing really consoling me was that we would be continuing to pay off our mortgage sum. We will pay a nominal rent at the new place but not much - that may change in future so we are trying to future-proof ourselves too. We don't want to 'get off' the property ladder, but as our mortgage repayments are quite high we are having trouble trying to balance finances and work out what would be better in the longer term.

I wonder then if it would make more sense to either buy our way out of our current mortgage and switch to a buy to let property - we'd be healthier on a month to  month basis in the longer term but wouldn't be making a capital investment (?)
Or to think about selling our current house and investing in a property elsewhere that we will not have to pay such substantial repayments on/that will work out to be more financially viable in the round. It sounds as though our current plan is not particularly savvy! Thanks so much for the links and the info on how to work out interest rates etc.

greatcrested

A loss of £6,500 pa is madness, especially when you add in the uncertainty of one bad tenant, one long void, one major repair, plus the regular maintenance overheads and, not least, the stress.......

Against that, you save the £10K ER penalty by waiting 2 years!

Sell. You then have the capital in your pocket and can choose

* wait and then buy again where you are relocating (with a decent deposit at your disposal and hence a better interest rate)

* put it towards a pension (very tax efficient as the gov will contribute too)

* invest it (though think 5 years+)

* go on a round the world cruise (OK, maybe not right now!)

* Buy a smaller, cheaper property as a BTL, selecting a location and property suitable for a letting business, perhaps nearby where you can self-manage after learning what's what.