Leveraging property to invest

El_Torro

I have a plan. I think it's a good plan, and depending on how things go over the next few years I'm pretty sure I'll implement it. Just wanted people's thoughts on whether I'm missing an obvious pitfall.

I own two properties, one I live in and the other is a Buy to Let. Both properties are mortgaged, my residential property has about 14 years left on the mortgage and the BTL is on an interest only mortgage. Both mortgages are fixed for the next 4 years on less than 2% interest. 

My plan is to keep my mortgages as they are for now, then when the fixed rate term expires (both mortgages are due to expire at the same time) I will borrow more on my BTL and use that money to fully pay off my residential mortgage. Depending on how the value of the BTL changes over the next few years I will still have about 35% equity in my BTL property. This 35% should more than cover the fees and taxes I will need to pay if I ever decide to sell the property. 

The advantage I see of doing this is that my mortgage fees reduce (arranging 1 mortgage is cheaper than arranging 2 mortgages) and since my residential property will be mortgage free I can use the money I don't spend on mortgage repayments to invest in pensions and ISAs. The idea is that whenever I remortgage in future I will extract more equity from the BTL and invest it, bearing in mind that I want to keep a healthy amount of equity in the property at all times (at least 30%). 

I know that borrowing to invest is frowned upon (for good reason), though since I will be living in a mortgage free property I think this greatly reduces the risks I will be exposed to. 

So, perfect plan, right? Any comments or suggestions are welcome

Alexland

Without knowing your full circumstances it's hard to comment but owning your own home outright and keeping a BTL leveraged at 35% doesn't sound unreasonable especially if you are in parallel building up investment assets which will also generate some income.
Assuming the 2 properties are equal value that would still mean you own nearly 70% of them or perhaps more as people's BTL tend to be lower value than their main homes. Across all your assets I am guessing you might be between 10% and 20% leveraged? A bit like a DIY investment trust. Our leverage is now under 10% which is probably too conservative for our age.
It's worth considering how this lower equity might affect the rate you pay on the BTL mortgage. Although undesirable the interest rate might be better secured on your main home.
You probably already need to hold extra emergency cash you need to hold for repairs to either property or rent voids and consider your income tax position.
Also as valuation creep up you might want to hold a higher proportion on the BTL to cover not only the risk of selling in an unfavorable environment but also any capital gains liability.

Thrugelmir

El_Torro said:

I know that borrowing to invest is frowned upon (for good reason), though since I will be living in a mortgage free property I think this greatly reduces the risks I will be exposed to. 

Your assumption is that both will do well. Borrowing to invest magnifies both gains and losses.  Risk comes in many many forms. List them and decide how susceptible you are personally to any of them. In any event I'd suggest seeing how the next 4 years go. Then see how the land lies.

msallen

El_Torro said:

I have a plan. I think it's a good plan, and depending on how things go over the next few years I'm pretty sure I'll implement it. Just wanted people's thoughts on whether I'm missing an obvious pitfall.

I own two properties, one I live in and the other is a Buy to Let. Both properties are mortgaged, my residential property has about 14 years left on the mortgage and the BTL is on an interest only mortgage. Both mortgages are fixed for the next 4 years on less than 2% interest. 

My plan is to keep my mortgages as they are for now, then when the fixed rate term expires (both mortgages are due to expire at the same time) I will borrow more on my BTL and use that money to fully pay off my residential mortgage. Depending on how the value of the BTL changes over the next few years I will still have about 35% equity in my BTL property. This 35% should more than cover the fees and taxes I will need to pay if I ever decide to sell the property. 

The advantage I see of doing this is that my mortgage fees reduce (arranging 1 mortgage is cheaper than arranging 2 mortgages) and since my residential property will be mortgage free I can use the money I don't spend on mortgage repayments to invest in pensions and ISAs. The idea is that whenever I remortgage in future I will extract more equity from the BTL and invest it, bearing in mind that I want to keep a healthy amount of equity in the property at all times (at least 30%). 

I know that borrowing to invest is frowned upon (for good reason), though since I will be living in a mortgage free property I think this greatly reduces the risks I will be exposed to. 

So, perfect plan, right? Any comments or suggestions are welcome

If you are maintaining the same amount of mortgage debt then why will your mortgage payments be lower?

thegentleway

msallen said:

El_Torro said:

I have a plan. I think it's a good plan, and depending on how things go over the next few years I'm pretty sure I'll implement it. Just wanted people's thoughts on whether I'm missing an obvious pitfall.

I own two properties, one I live in and the other is a Buy to Let. Both properties are mortgaged, my residential property has about 14 years left on the mortgage and the BTL is on an interest only mortgage. Both mortgages are fixed for the next 4 years on less than 2% interest. 

My plan is to keep my mortgages as they are for now, then when the fixed rate term expires (both mortgages are due to expire at the same time) I will borrow more on my BTL and use that money to fully pay off my residential mortgage. Depending on how the value of the BTL changes over the next few years I will still have about 35% equity in my BTL property. This 35% should more than cover the fees and taxes I will need to pay if I ever decide to sell the property. 

The advantage I see of doing this is that my mortgage fees reduce (arranging 1 mortgage is cheaper than arranging 2 mortgages) and since my residential property will be mortgage free I can use the money I don't spend on mortgage repayments to invest in pensions and ISAs. The idea is that whenever I remortgage in future I will extract more equity from the BTL and invest it, bearing in mind that I want to keep a healthy amount of equity in the property at all times (at least 30%). 

I know that borrowing to invest is frowned upon (for good reason), though since I will be living in a mortgage free property I think this greatly reduces the risks I will be exposed to. 

So, perfect plan, right? Any comments or suggestions are welcome

If you are maintaining the same amount of mortgage debt then why will your mortgage payments be lower?

Residential is repayment and B2L is interest only

msallen

Interest only BTL (with less equity after the re-jig) will probably be at a higher interest rate than the combined average of the current two, offsetting a chunk of what is currently going to reduce the capital. I can't see much scope for a significant spare amount.

El_Torro

Thanks for the comments so far.

My two mortgages actually have a similar interest rate today, about 1.80% for my residential property and about 1.90% for my BTL. As mentioned by a couple of posters the big difference is that my BTL is interest only and my residential mortgage is repayment. The difference is quite big at the moment since my residential mortgage only has 14 years left on it.

Also, I get tax relief on my BTL mortgage, which helps offset the fact that residential mortgages tend to be cheaper (lower interest rates).

Some valid points so far, though according to my calculations once I only have one mortgage my payments should be a couple hundred pounds a month cheaper than my current situation. A 65% LTV might not get me the lowest available interest rates, though it’ll be close.

Of course if interest rates ever significantly increase I might not like the fact that I have a large BTL mortgage. Even so the rental income  should comfortably cover the mortgage (and then some).

Thrugelmir

El_Torro said:

Even so the rental income  should comfortably cover the mortgage (and then some).

As long as the tenant doesn't default.  If you have void periods you'll need to cover more than just the mortgage. Hopefully you'll building a maintenance reserve as well.  

thegentleway

Agree with @Thrugelmir that it would be wise to stress test that assumption: e.g. higher interest rates, evictions, etc...