Repay BTL mortgage with pension lump sum or sell?

2nd_time_buyer

gunnag said:

Thanks for that insightful comment, I used one of the online BTL tax calculator tools and worked out the following scenarios:-

- sell house and realise £160k profit, invest in ISA or similar @ 5% = £8k profit as already mentioned

- keep house, increase rent to £1450 next year (Agent is already doing this), pay off £160k from BTL mortgage using the pension lump sum, new mortgage would be approx £25k at around 3.5% (I estimate next year).Still working annual income £65k, BTL net Profit = £7939.

So there's not much difference between the two options, although BTL does require maintenance, etc. At least I keep the house, which has been in my family since 1968, and I'm kind of attached to it.

Luckily, my residential property is mortgage-free, and I don't need to worry about paying off any mortgage on that which is a relief.

I'm in a similar situation with the mortgage due for renewal this autumn. Like you, I think we can just balance the books and we have good tenants. My thinking

Positives of keeping the BTL:
- don't have to evict tenants
- house prices could go up
- no capital gains tax (at least in the short term)
- interest rates could fall

Negatives
- more hassle 
- potential of major outgoings e.g. boiler, roof.
- anxiety of having mortgage debt

On balance, I think for the time being the first positive will win out. As it is a young family and I think they will really struggle to find somewhere at a similar (below market) rent. But, I will probably fix for a shorter period (e.g. 2 years).

Roger175

Gunnag. At the beginning of last year we were in very similar circumstances to you. Owners of a BTL with broadly similar values/ratios. We had fully intended keeping this property well into retirement and had always considered the income would be part of our pension provision. However things began to change, firstly we had a series of frustrating issues with the house (boiler replacement, then failure of new boiler immediately before Christmas etc), then it stated becoming apparent that interest rates were going to seriously impact the mortgage cost when the fixed period came to an end. We began thinking about selling, but, like you, we also had a great tenant and initially we felt morally obliged to keep renting out the property. In the end, we approached the tenant and explained the situation, they understood and immediately started looking elsewhere and within 4 months the house was sold.

It was the best thing we ever did. The stress disappeared overnight and we are currently getting pretty much the same net income with our money on deposit in various fixed term cash savings accounts, certainly far more that we would have been getting once the mortgage rate went up, in-fact we reckon we would have been barely breaking even after the tax etc. Unfortunately, because we didn't plan to sell and therefore the financial planning was poor, there was only so much of the sale proceeds that we could get into pensions (both recently took early retirement, so little relevant earnings) and it will take years to get the money into ISA's. 

Beddie

I wish "Shelter" would read comments such as these from landlords. Not selling, as concerned about tenants finding somewhere else. Not putting up the rent, as they know they're struggling. According to the BBC and others, all landlords are evil.

I'd tend to go with your suggestion of selling once the existing tenants decide to move - financially it might not be the best move, but is the tidiest way and if you're undecided now it will focus the mind on the need to take action.

Roger175

Beddie said:

I wish "Shelter" would read comments such as these from landlords. Not selling, as concerned about tenants finding somewhere else. Not putting up the rent, as they know they're struggling. According to the BBC and others, all landlords are evil.

I'd tend to go with your suggestion of selling once the existing tenants decide to move - financially it might not be the best move, but is the tidiest way and if you're undecided now it will focus the mind on the need to take action.

Beddie, I agree. We have various friends/acquaintances who are landlords and most if not all are very caring and take their responsibility toward the tenants very seriously. We actually manage a flat that our son rents out (since it's local to us) and again take things very responsibly. On the handful of occasions that there have been issues, I have rushed round and they are usually sorted within hours.

Qyburn

Beddie said:

I wish "Shelter" would read comments such as these from landlords. Not selling, as concerned about tenants finding somewhere else. Not putting up the rent, as they know they're struggling. According to the BBC and others, all landlords are evil.

And the Scottish government who seem hell bent on stamping out what they call "amateur" landlords, and have a goal of all private rental being run by businesses.

gunnag

Yes I have included CGT in any profit and I forgot that ISA's have a yearly limit, so would need 8 years as suggested.

I expect that inflation will fall in the coming years and that returns from ISA's will also fall, which makes the BTL route more attractive since my current yield is somewhere around 5% depending on how its calculated.

Hoenir

gunnag said:

new mortgage would be approx £25k at around 3.5% (I estimate next year)

Strikes me as being optimistic. Lower fixed rate interest products tend to come with punitive fees. Primarily to set a bar as the minimum advance lenders wish to deal in. 

gunnag

Strikes me as being optimistic. Lower fixed rate interest products tend to come with punitive fees. Primarily to set a bar as the minimum advance lenders wish to deal in.

Looks like you are right. I just did a full search for a £25k 5-year fixed BTL mortgage, and the rates are higher. If I bump the mortgage up to £40k I can get a rate of 4.09% at current rates.

I will have to mull over all these factors over the coming weeks and decide which is best.