Remortgaging a property to buy a BTL: Is it worth it?

siliconbits

I had an interesting conversation with a friend of mine earlier today and she's exploring paying off her mortgage and launching herself in the brave new world of BTL by remortgaging her existing property and buying a smaller property outright, so all the rent money (minus 20% tax) would feed into the remortgage repayment. I personally don't think it is a good idea. In her case, she'd be paying about £2K for the mortgage per month with a rent income of about £1K once you take away HRMC, insurance, agency fees and others. Is it really about getting another house for "just £1K net per month" as she puts it, What do forumites think?

Thrugelmir

If there's no rental income can your friend afford the £2k plus outgoing every month? Not just the mortgage to cover but all the other standard property costs as well. 

siliconbits

She mentioned something about guaranteed rent schemes. I've seen some of these billboards pop here and there but haven't dug deeper.

MalMonroe

Paying off her mortgage and then remortgaging to buy a property to rent out??   No.  I'm with you, I don't think it's a good idea at all.

Snookie12cat

Sounds like they didn't think it through at all. She would have to pay the extra stamp duty as well, plus even with rental guarantee you do not always get the rent and if you do not always in a timely manner. 

siliconbits

Thanks everyone for your sound arguments.

[Deleted User]

depends where it is.  Lots of people around me do it and the rents barely cover the costs but the capital increase on the other property makes it worthwhile.   Friend of mine did it 3 years ago and the property she bought is realistically worth £50k-£60k more now

If its got that potential then it can be an option so i would be open to the idea if it was me.  

dimbo61

No such thing as a free lunch.
Capital gains tax, income tax, and all the costs of owning and running a rental property.
Rental Guarantee schemes can come with hefty fees.

steampowered

Your friend will get a lower interest rate by remortgaging her own property, rather than taking out a BTL mortgage.

However:
1) You can get a tax credit on interest payments on BTL mortgages.
2) BTL mortgages can be interest only. These days residential mortgages are generally repayment only.

The bigger question is whether your friend should be getting into the buy-to-let business at all. From a tax perspective BTL is not a great business (income tax on rent, capital gains tax when you sell, higher rate stamp duty when you buy) and there are lots of costs involved (conveyancing, letting agent fees, maintenance costs). It also comes with hassle and with significant risk (if a tenant stops paying the rent it is expensive and difficult to get them out). 

Your friend could consider investing into stocks & shares. Ideally investing £20k per year to make the most of her stocks & shares ISA allowance. This has many advantages over BTL:
1) Very tax efficient - can be completely tax free if investing into a stocks & shares ISA.
2) Easy - you can now invest in global passive funds which take an average across the entire stock market, so there is much less risk than there would be buying a single company's shares.
3) Low hassle
4) Low cost 
5) Attractive returns - the major stock markets over the long term have historically generated a return of about 7.5% per year. 

siliconbits

steampowered said:

Your friend will get a lower interest rate by remortgaging her own property, rather than taking out a BTL mortgage.

However:
1) You can get a tax credit on interest payments on BTL mortgages.
2) BTL mortgages can be interest only. These days residential mortgages are generally repayment only.

The bigger question is whether your friend should be getting into the buy-to-let business at all. From a tax perspective BTL is not a great business (income tax on rent, capital gains tax when you sell, higher rate stamp duty when you buy) and there are lots of costs involved (conveyancing, letting agent fees, maintenance costs). It also comes with hassle and with significant risk (if a tenant stops paying the rent it is expensive and difficult to get them out). 

Your friend could consider investing into stocks & shares. Ideally investing £20k per year to make the most of her stocks & shares ISA allowance. This has many advantages over BTL:
1) Very tax efficient - can be completely tax free if investing into a stocks & shares ISA.
2) Easy - you can now invest in global passive funds which take an average across the entire stock market, so there is much less risk than there would be buying a single company's shares.
3) Low hassle
4) Low cost 
5) Attractive returns - the major stock markets over the long term have historically generated a return of about 7.5% per year. 

She retorted that you are inherently getting return on something that, by itself, suffers from inflation. Property, on the other hand, almost always goes up. Although making it liquid could take time.