Updated: Questions about letting out a property

jonnydeppiwish!

saajan_12 said:

jonnydeppiwish! said:

Hi

Just a few questions as we are hypothetical thinking about letting out our current property and buying a detached property as our home.

Rental income is taxed - if I was just into the higher tax bracket, would I have to pay 40% on all the rent (probably around £14k pa), part of it or none of it? - first you deduct non financing costs (eg insurance, agent, repairs, etc). Then you pay income tax in the usual bracket system on top of your salary income (so eg if your salary is just below the higher rate threshold, then most of the rent will be at 40% anyway). You then get credit for 20% of the mortgage interest only - note this doesn't include capital repayments, doesn't bring you down a tier etc. 

In order to purchase the new property, we’d need to get a smallish (£150k) BTL mortgage on the current  property which is mortgage free. When I’ve looked at rental yields, they only come in at 4% so would that look bad when applying? Current property is worth conservatively £400k. - They'd usually just want your rental income to cover X % of the mortgage payment (often 125%), so if monthly rents are £1,333 (4% x 400k/12) and on an 3.5% interest only mortgage you're paying £365 a month, that'll usually be fine. 
However for you, is it a good investment for the risk and hassle?

As I said previously, this is all hypothetical, looking at all the options!

Mortgage approval aside, is this a good investment yield for you? Is the 4% a gross yield, or after costs? Whats the return on the actual 250k you're investing ?

Thanks for you insightful comments - really appreciated. I’m just sitting down and going through the costs using the independent landlord advice and @G_Ms guide to see the feasibility of it.

jonnydeppiwish!

Updated as more advice needed! Thanks

Annisele

Following your update - how much are you planning to do to the new place? 6 months sounds like quite a long time for a £25k budget (unless that is just materials, and you're planning on doing the labour yoursef). I'm wondering if the new property is even mortgagable in its current state, if it needs that much time spending on it. You might be looking at development finance rather than a standard residential mortgage.

Where will you be living while you do the work? I'm assuming in the existing property - and if that's the case you won't be able to get a BTL on it. One of the mortgage conditions of a BTL will be that you don't live in it yourself.

What are the relative values of the two properties, and how much do you already owe on the first one? Would it be possible to borrow enough secured against your existing house to let you be a cash buyer for the second one?

jonnydeppiwish!

Annisele said:

Following your update - how much are you planning to do to the new place? 6 months sounds like quite a long time for a £25k budget (unless that is just materials, and you're planning on doing the labour yoursef). I'm wondering if the new property is even mortgagable in its current state, if it needs that much time spending on it. You might be looking at development finance rather than a standard residential mortgage.

Where will you be living while you do the work? I'm assuming in the existing property - and if that's the case you won't be able to get a BTL on it. One of the mortgage conditions of a BTL will be that you don't live in it yourself.

What are the relative values of the two properties, and how much do you already owe on the first one? Would it be possible to borrow enough secured against your existing house to let you be a cash buyer for the second one?

6 months is just getting the trades sorted.  It’s definitely mortgageable at present.

Current home is circa £400k, new one is the £400k but detached and larger with a garage. Location is very similar and we like it.

The budget is from experience of completing a similar renovation in November.

£25k is a new kitchen and load bearing wall removed, bathroom, toilet, skimmed throughout, new flooring/carpets, and new windows and door throughout. Apart from windows, plastering and wall removal and carpets, I’ll do a lot of the menial work myself.

We’d like to retain the current property to live in whilst we do the new one up if possible.

No mortgage at the moment, current disposal income is circa £4k with ~£50k savings.

Thanks for the reply!

Annisele

This might be one for a whole of market broker. Depending on exactly what you mean by "disposable" and "circa", it's possible that you'll be very tight on affordability with income of £4k a month.

If you're OK on affordability, there are going to be advantages and disadvantages to securing the lending against your current home, your new one, or partly on each. What those factors are will depend on part on what's available to you - depending on the exact figures you might be drowning in options, have exactly one option, or no options at all.

I believe there are still some lenders doing interest only mortgages for the purpose of buying a second property, but that won't necessarily be the way to get the best rates.

Gycraig

Is it worth all the hassle of being a landlord when saving accounts will almost match that yield right now ? 

jonnydeppiwish!

Gycraig said:

Is it worth all the hassle of being a landlord when saving accounts will almost match that yield right now ? 

No, that’s why’s I’m trying find alternative finance for a new purchase rather than buy / sell immediately. Spent a long time reading the regs and decided against letting 👍