Buy to let changing to residential /main home - considerations?

Helpmedecide45

I’m at the research stage but wondering if there is anything I’m missing, so would really appreciate any thoughts or insights!
I have a buy to let property in the south east, and live in London with my partner and 2 children in a mortgaged house. I’m considering selling the BTL (it’s 100% mine), which has only a small mortgage on it of around £60k, and buying a more expensive property in London.
 The reasons are primarily that I want to make an exit plan to leave my relationship but can’t currently afford to do so (moving to the BTL isn’t an option for various reasons, so I want to stay in our current area). 

I’ve just signed up for a new 2 year fixed rate (repayment) under BTL terms, and the tenants just signed a new contract with a 6 month break clause. My rental income is around £1200 a month (after management fees) which I then pay tax on, so I net about £10k per year. The property has been valued last week and I’ve got just under £300k of equity in it.
in my area in London the rental income is likely to be around £1000 more per month. I also feel that the property value is likely to increase more quickly, as I’m disappointed in the slow growth of the BTL in the 4 years I’ve owned it. I’d be looking to buy a property for around £550k, then within 2 years of ownership stop renting it out and move in with my children.
Things I’ve considered:
- I would need an additional mortgage for the increased amount. Would this be a new application, or is it best to go to my lender and ask how much more they could lend me, so I port the existing mortgage but then have a separate additional one?
- I would need to be able to afford the mortgage without rental income - presumably once I leave our family home I will get out my 25% stake (probably £150k minimum), but can’t count on this happening straight away. It’s hard to calculate this element now knowing what the rate on a residential mortgage would be though, but affordability is my main consideration 
- I will need to pay 2nd property stamp duty but I think I can claim this back if it becomes my main property within 2 years?

Is there anything I have missed? Also, I’m unclear if I would need a BTL mortgage if I know it’s going to be temporary; I assume I would, but if I fixed for 1 year, considered interest only, this could then work presumably? I could then save all of the rental income to belp
fund the move etc. 
I know that my children’s father would have some financial liability but I’m keen to do the maths to make this work without relying on this. We’re not married which I think makes any financial arrangements more complex.

theartfullodger

How much CGT will be due?  Needs declaring AND paying within 60days of sale so get prepared!

propertyrental

Helpmedecide45 said:

.....

Things I’ve considered:
- I would need an additional mortgage for the increased amount. Would this be a new application, or is it best to go to my lender and ask how much more they could lend me, so I port the existing mortgage but then have a separate additional one? Speak to an independant mortgage broker, and/or ask your current lender
- I would need to be able to afford the mortgage without rental income - presumably once I leave our family home I will get out my 25% stake (probably £150k minimum), but can’t count on this happening straight away.

How? Would the current home be sold? Would/could your partner buy you out? Is the split going to be amicable or adversarial - big difference in potential timescales

 It’s hard to calculate this element now knowing what the rate on a residential mortgage would be though, but affordability is my main consideration speak to a broker
- I will need to pay 2nd property stamp duty but I think I can claim this back if it becomes my main property within 2 years? You can claim back the additional SDLT (in England) if you sell your current primary residence within 3 years

Is there anything I have missed? Also, I’m unclear if I would need a BTL mortgage if I know it’s going to be temporary; have I missed something? You are buying a new property in order to make it your home. Why BTL?

 I assume I would, but if I fixed for 1 year, considered interest only, this could then work presumably? I could then save all of the rental income to belp I've not understood your plan. But if you intend to buy a new property, let it (for a year?) and then split up and move there, what happens if the tenant does not leave......?
fund the move etc. 
I know that my children’s father would have some financial liability but I’m keen to do the maths to make this work without relying on this. We’re not married which I think makes any financial arrangements more complex.

As artful says, there'll be a CGT liability when you sell the existing BTL.

saajan_12

What would you do in the meantime - rent elsewhere or stay put? Why not either leave the BTL as is for that time or sell and invest the money elsewhere (eg in an investment portfolio or high yield account) in the meantime? Reasons are 

- pay early repayment charges on current BTL unnecessarily
- may need to partly renovate twice in 1 year, when you buy and then when the tenants move out to make it nice for you and kids
- may need to go through court process to evict tenants who are aggrieved at being turfed out in a year
- if new property has higher rent and higher mortgage, then this is inefficient tax wise. Even if the 'profit' stayed the same, the mortgage interest only gains 20% tax relief, against income that could push you / cost you in the 40% bracket. 

Helpmedecide45

propertyrental said:

Helpmedecide45 said:

.....

Things I’ve considered:
- I would need an additional mortgage for the increased amount. Would this be a new application, or is it best to go to my lender and ask how much more they could lend me, so I port the existing mortgage but then have a separate additional one? Speak to an independant mortgage broker, and/or ask your current lender
- I would need to be able to afford the mortgage without rental income - presumably once I leave our family home I will get out my 25% stake (probably £150k minimum), but can’t count on this happening straight away.

How? Would the current home be sold? Would/could your partner buy you out? Is the split going to be amicable or adversarial - big difference in potential timescales

 It’s hard to calculate this element now knowing what the rate on a residential mortgage would be though, but affordability is my main consideration speak to a broker
- I will need to pay 2nd property stamp duty but I think I can claim this back if it becomes my main property within 2 years? You can claim back the additional SDLT (in England) if you sell your current primary residence within 3 years

Is there anything I have missed? Also, I’m unclear if I would need a BTL mortgage if I know it’s going to be temporary; have I missed something? You are buying a new property in order to make it your home. Why BTL?

 I assume I would, but if I fixed for 1 year, considered interest only, this could then work presumably? I could then save all of the rental income to belp I've not understood your plan. But if you intend to buy a new property, let it (for a year?) and then split up and move there, what happens if the tenant does not leave......?
fund the move etc. 
I know that my children’s father would have some financial liability but I’m keen to do the maths to make this work without relying on this. We’re not married which I think makes any financial arrangements more complex.

As artful says, there'll be a CGT liability when you sell the existing BTL.

Thanks so much for your responses - my thinking is that I can’t afford/am not ready yet to move out of the family home, and a friend suggested this idea to buy a new BTL. The thinking was that I could get a property lined up, rent it initially but then plan to move us into it within the next year or 2 once I have banked some of the rental income, increased my salary and also my savings. If I were to buy a new home now, my budget would be significantly smaller plus I’d lose the current rental income. 

My partner is fairly unlikely to be able to keep our house if I move out (though it’s possible), so I assume we would sell and I’d then get my share (minimum £150k). But as a split is likely to be acrimonious I don’t want to count on this as paying for my new housing as it could take ages. It’s possible he may inherit in the next few years which would change things again, but I’d want to be bought out if he stays there. 

The question “what happens if the tenants do not leave” - I understand that sometimes things don’t go to plan, but surely if tenants sign a 12 month agreement and then at the end of it I don’t renew it, then that should be straightforward? I did this when I sold my previous BTL in London and it was ok, but maybe I’m being naive! 

Helpmedecide45

saajan_12 said:

What would you do in the meantime - rent elsewhere or stay put? Why not either leave the BTL as is for that time or sell and invest the money elsewhere (eg in an investment portfolio or high yield account) in the meantime? Reasons are 

- pay early repayment charges on current BTL unnecessarily
- may need to partly renovate twice in 1 year, when you buy and then when the tenants move out to make it nice for you and kids
- may need to go through court process to evict tenants who are aggrieved at being turfed out in a year
- if new property has higher rent and higher mortgage, then this is inefficient tax wise. Even if the 'profit' stayed the same, the mortgage interest only gains 20% tax relief, against income that could push you / cost you in the 40% bracket. 

The higher tax bracket is something I hadn’t considered, so thanks for mentioning that. I currently am just into the 40% bracket so would need to do the sums on that basis.

If it’s possible to port a BTL mortgage as I’m thinking (hoping) then I wouldn’t have any early repayment charges, whereas if I sold now I would. And as I asked propertyrental -how much of an issue is it for a tenancy to only run for 1 year if that’s what the agreement is for? If i were (for example) moving overseas for a year and wanted to rent my house out that would be an option, without fear of the tenants refusing to leave? Or am I living in cloud cuckoo land (aka I’ve been lucky so far!).
in terms of what I plan to do in the meantime, I’m staying in the family home, gritting my teeth and trying to save/plan/invest as much as possible while I try to get brave to leave an emotionally abusive relationship. Just trying to get the best setup for my children and I before we go.

Hoenir

Helpmedecide45 said:

propertyrental said:

Helpmedecide45 said:

.....

Things I’ve considered:
- I would need an additional mortgage for the increased amount. Would this be a new application, or is it best to go to my lender and ask how much more they could lend me, so I port the existing mortgage but then have a separate additional one? Speak to an independant mortgage broker, and/or ask your current lender
- I would need to be able to afford the mortgage without rental income - presumably once I leave our family home I will get out my 25% stake (probably £150k minimum), but can’t count on this happening straight away.

How? Would the current home be sold? Would/could your partner buy you out? Is the split going to be amicable or adversarial - big difference in potential timescales

 It’s hard to calculate this element now knowing what the rate on a residential mortgage would be though, but affordability is my main consideration speak to a broker
- I will need to pay 2nd property stamp duty but I think I can claim this back if it becomes my main property within 2 years? You can claim back the additional SDLT (in England) if you sell your current primary residence within 3 years

Is there anything I have missed? Also, I’m unclear if I would need a BTL mortgage if I know it’s going to be temporary; have I missed something? You are buying a new property in order to make it your home. Why BTL?

 I assume I would, but if I fixed for 1 year, considered interest only, this could then work presumably? I could then save all of the rental income to belp I've not understood your plan. But if you intend to buy a new property, let it (for a year?) and then split up and move there, what happens if the tenant does not leave......?
fund the move etc. 
I know that my children’s father would have some financial liability but I’m keen to do the maths to make this work without relying on this. We’re not married which I think makes any financial arrangements more complex.

As artful says, there'll be a CGT liability when you sell the existing BTL.

The question “what happens if the tenants do not leave” - I understand that sometimes things don’t go to plan, but surely if tenants sign a 12 month agreement and then at the end of it I don’t renew it, then that should be straightforward? I did this when I sold my previous BTL in London and it was ok, but maybe I’m being naive! 

The tenant from hell does exist. Better to go into a business ventures with your eyes wide open. 

RAS

Helpmedecide45 said:

The question “what happens if the tenants do not leave” - I understand that sometimes things don’t go to plan, but surely if tenants sign a 12 month agreement and then at the end of it I don’t renew it, then that should be straightforward? I did this when I sold my previous BTL in London and it was ok, but maybe I’m being naive! 

Not sure who was more naive, you or your previous tenants.

A tenancy can only be ended by the tenants or the court. Landlords can't end a tenancy; they can only give notice that if the tenant doesn't move out (or pay arrears), they will start court proceedings.

Given the current difficulty finding new tenancies, tenants will hold out as long as possible. If they need rehousing by the Council, they will have to stay put until the bailiffs arrive.

If you've got your paperwork and notice to quit (S21 or S8) absolutely right, you'll get a court date and then hopefully the court will tell the tenant to leave by a specified date.  If they haven't gone by that date, you go back and get permission to use bailiffs on or after an agreed date. There are sometimes ways for the tenant to delay that further and there may be a delay in getting bailiffs to act. So anything from 6-18 months depending where you are.

And if you've not got the paperwork absolutely correct, expect to hit the buffers before the court hearing, go back, correct, and start applying for a new court date.

Helpmedecide45

@RAS it was in early 2020, I don’t know if rules/the landscape has changed since then (I’m not a commercial landlord, but an accidental one originally, so I have trusted agents to keep me abreast of the rules).

From what you’re saying it’s like the property owner has less rights to their own property than the tenants do… I understand that tenants need protection but this does sound a bit mad if it’s true! So I have no rights whatsoever to end a tenancy at the end of the contract, even if I were selling the property? (This was the case in 2020). Or is it ok to end the tenancy if you’re selling, but not if it’s to move in yourself or for other reasons? 

propertyrental

Helpmedecide45 said:

propertyrental said:

Helpmedecide45 said:

.....

Things I’ve considered:
- I would need an additional mortgage for the increased amount. Would this be a new application, or is it best to go to my lender and ask how much more they could lend me, so I port the existing mortgage but then have a separate additional one? Speak to an independant mortgage broker, and/or ask your current lender
- I would need to be able to afford the mortgage without rental income - presumably once I leave our family home I will get out my 25% stake (probably £150k minimum), but can’t count on this happening straight away.

How? Would the current home be sold? Would/could your partner buy you out? Is the split going to be amicable or adversarial - big difference in potential timescales

 It’s hard to calculate this element now knowing what the rate on a residential mortgage would be though, but affordability is my main consideration speak to a broker
- I will need to pay 2nd property stamp duty but I think I can claim this back if it becomes my main property within 2 years? You can claim back the additional SDLT (in England) if you sell your current primary residence within 3 years

Is there anything I have missed? Also, I’m unclear if I would need a BTL mortgage if I know it’s going to be temporary; have I missed something? You are buying a new property in order to make it your home. Why BTL?

 I assume I would, but if I fixed for 1 year, considered interest only, this could then work presumably? I could then save all of the rental income to belp I've not understood your plan. But if you intend to buy a new property, let it (for a year?) and then split up and move there, what happens if the tenant does not leave......?
fund the move etc. 
I know that my children’s father would have some financial liability but I’m keen to do the maths to make this work without relying on this. We’re not married which I think makes any financial arrangements more complex.

As artful says, there'll be a CGT liability when you sell the existing BTL.

.......

 I understand that sometimes things don’t go to plan, but surely if tenants sign a 12 month agreement and then at the end of it I don’t renew it, then that should be straightforward? I did this when I sold my previous BTL in London and it was ok, but maybe I’m being naive! 

Without wishing to be rude yes, you are being naive. The (English) law is clear. When that 12 month term ends, if the tenants remain they automatically create a periodic (rolling) tenancy. Only a court can end the tenancy and eventually force the tenants out. This can take many months.

Before embarking on this plan I urge you to learn all there is to be learned about tenancy law so you know a) how to manage and b) how to end a tenancy. See

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?

Bookworm105

Helpmedecide45 said:

 

in terms of what I plan to do in the meantime, I’m staying in the family home, gritting my teeth and trying to save/plan/invest as much as possible while I try to get brave to leave an emotionally abusive relationship. Just trying to get the best setup for my children and I before we go.

as an investment option purchasing a BTL with a view to operating it for only 12 months is highly risky. 

are you going to advertise it with the clear statement there is no possibility of renewing the tenancy after 12 months?
in their shoes, if you were looking to rent would you take such a place knowing you'd have to pay another set of removal costs and fees in 12 months (plus suffer the cashflow problem of funding a new deposit before the old one is released)?

You need to play with some very detailed numbers before you can even begin to guesstimate if you would get a better return from a BTL investment rather than staying as you are with current income but invested in a "safer" investment product

Also, whilst it is true that rental are scarce, would a property that you want to eventually live in as your main home be one that is actually the best option to purchase as a prospective rental property?