Advice on let to buy/second property

Ldneast

Hello all, 

We are a family of 4 (two kids under 10) and have outgrown our two bed house. One option I am exploring is converting our current mortgage to a let to buy and then purchasing a second property.

We bought our property for £340,000 and is now valued at £420,000. The new property we are looking at would be in the region on £550,000. I have never owned a second property and the idea of being a landlord doesn't fill me with excitement. We have spoken to a mortgage advisor who has said it is affordable for us to get the lending. The approx gross rental income we would get would be £1900 per month.

My main concern would be any tax implications and if it is actually financially worth following through. I understand there are a lot of financial costs such as insurance, maintenance, property management fees ( at 12% from some of the companies we have researched). We both work full time and the new mortgage would be stretching us compared to what we are paying now. It would also add more years to our term than what we are currently on but the income received from the Let to Buy should help us offset this.

Any thoughts, comments, ideas would be welcome from anyone whether they think this is a feasible idea especially from anyone that has done this themselves.

Thank you.

user1977

Best to change your subject line to something more specific - almost every thread here is about "advice"!

Bluebell1000

We did this about 6 years ago. With mortgage rates at current levels, I wouldn't do it now (though we do still have the rental, and are not planning to sell, we'd be making more money if we just put the capital into a savings account).

On that kind of value you'll have quite a lot of extra cost with higher rate stamp duty, and servicing two mortgages, plus maintenance of two houses. Would it push you into a 40% tax bracket? If so you will lose a lot of that to tax. There will also be void periods where you don't get any rental income, and if the mortgages are a stretch it would seem risky. You may be better selling your current house and using the money to give you a larger deposit on the new house.

We used a letting agent at the start, but they weren't particularly good so we went self-managed via open rent.  

RHemmings

If you rent out your existing house, but your tenants stop paying rent and you have to fight to get them out, then you would be paying two mortgages with no rental income for a possibly extended time. Could you afford to do that? Would you risk losing one or both houses?

I'm not saying to not do it, but financial stress testing is an IMHO necessary part of the consideration needed.  One of many parts of the consideration needed.

HouseMartin567

As you have rightly identified you will need to do the sums taking into account management fees, maintenance, voids and tax. You have said you think you will receive £1,900 in rental income, but that figure is slightly irrelevant when you don’t say how much the mortgage will be or what band of tax you will need to pay.

Also, don’t forget, as this would be an additional property you will need to pay a whopping £31.5k just in stamp duty.

I let my property out for 4 years (before moving back into it). I had no issues and made a profit, but after hearing lots of horror stories I think I was quite lucky. It’s not for the faint-hearted.

Albermarle

Would be worth reading the next thread along from yours.
The original question was a bit daft, but you should find some of the replies interesting.
buy to let properties, are they still worth it in 2024 and beyond? — MoneySavingExpert Forum

Hoenir

 Ldneast said:

My main concern would be any tax implications and if it is actually financially worth following through. I understand there are a lot of financial costs such as insurance, maintenance, property management fees ( at 12% from some of the companies we have researched). 

Crunch the numbers fully. Remember to make provision for replacement of white goods and other longer term repairs and maintenance to the property. 

Bookworm105

are you relying on the rental income to cover some of the mortgage on the 550k new house?
if yes, then your plan is extremely high risk as you could end up in great debt and losing both properties

would your joint income cover both mortgages if the rental income stops? Void periods, non paying tenant?

as for tax, I assume the rent will be split between both of you, so will it push either into a higher tax bracket?

Grumpy_chap

Albermarle said:

Would be worth reading the next thread along from yours.
The original question was a bit daft, but you should find some of the replies interesting.
buy to let properties, are they still worth it in 2024 and beyond? — MoneySavingExpert Forum

That thread has now been culled.

Ldneast said:

Hello all, 

We are a family of 4 (two kids under 10) and have outgrown our two bed house. One option I am exploring is converting our current mortgage to a let to buy and then purchasing a second property.

We bought our property for £340,000 and is now valued at £420,000. The new property we are looking at would be in the region on £550,000. I have never owned a second property and the idea of being a landlord doesn't fill me with excitement. We have spoken to a mortgage advisor who has said it is affordable for us to get the lending. The approx gross rental income we would get would be £1900 per month.

My main concern would be any tax implications and if it is actually financially worth following through. I understand there are a lot of financial costs such as insurance, maintenance, property management fees ( at 12% from some of the companies we have researched). We both work full time and the new mortgage would be stretching us compared to what we are paying now. It would also add more years to our term than what we are currently on but the income received from the Let to Buy should help us offset this.

Any thoughts, comments, ideas would be welcome from anyone whether they think this is a feasible idea especially from anyone that has done this themselves.

Thank you.

I have done (still do) this and I would do it again.

The financial calculation is one you need to do for your own situation. 

Yes, there are tax implications:

• You will incur SDLT second property surcharge on the purchase of the new home.
• You will incur CGT on the sale of the current home at whatever future point you sell.  Based on current rules, that is the total increase in value pro-rata for months of being your main home and months of being let out.  You can allow for the costs of purchase and sale.  You can allow for 9 months at the end for selling up.  CGT rules and rates may be changed but you can only assess the situation on the current rules and rates as there are no firm changes announced.  You have the benefit that you can probably consider any changes that are announced (or direction of travel indicated) at the Budget which is in October.
• You will incur income tax on the nett profit received (after allowable expenses are deducted).  The amount suffered will depend on your marginal tax rates and whether the ownership is sole name or joint name and what proportion that allows the income to be split.
• Having the asset will impact access to any means tested benefits.

Some non-tax considerations:

• BTL mortgage rates are usually higher than owner-occupier mortgage rates.
• You will require "consent to let" from the mortgage lender.
• Fully Managed Letting Agent fees are likely to be 12% - 18% PLUS VAT.
• You need to be able to afford both mortgages even if there is no tenant in place, or a non-paying tenant.
• Dealing with a non-paying tenant is slow and stressful.
• You need to be able to detach yourself from the asset as being your home / former home.  It is purely an investment asset.

Ldneast

Bluebell1000 said:

We did this about 6 years ago. With mortgage rates at current levels, I wouldn't do it now (though we do still have the rental, and are not planning to sell, we'd be making more money if we just put the capital into a savings account).

On that kind of value you'll have quite a lot of extra cost with higher rate stamp duty, and servicing two mortgages, plus maintenance of two houses. Would it push you into a 40% tax bracket? If so you will lose a lot of that to tax. There will also be void periods where you don't get any rental income, and if the mortgages are a stretch it would seem risky. You may be better selling your current house and using the money to give you a larger deposit on the new house.

We used a letting agent at the start, but they weren't particularly good so we went self-managed via open rent.  

Thank you for sharing. It would put myself into the 40% tax bracket but my partner is already a high tax payer which is another consideration. I would love to know how people navigate this (legally!) as I know of many higher tax payers who are in this position. I think selling the house with a larger deposit is the risk averse and safe thing to do especially as you and others have pointed out, it would be a stretch. Part of me also knows this could also be an opportunity that may provide financial security for my family for years to come but also a forever home in a city where we very soon could be priced out. 

Ldneast

HouseMartin567 said:

As you have rightly identified you will need to do the sums taking into account management fees, maintenance, voids and tax. You have said you think you will receive £1,900 in rental income, but that figure is slightly irrelevant when you don’t say how much the mortgage will be or what band of tax you will need to pay.

Also, don’t forget, as this would be an additional property you will need to pay a whopping £31.5k just in stamp duty.

I let my property out for 4 years (before moving back into it). I had no issues and made a profit, but after hearing lots of horror stories I think I was quite lucky. It’s not for the faint-hearted.

The stamp duty is a big one for us. Selling our property and purchasing another one would pretty much half this cost for us.

I am currently a 20% tax payer and my partner 40%. This would push me into the higher tax bracket.

In terms of the mortgage I am not 100 per cent certain at present. Still researching but the BTL I have been advised to keep as an interest only mortgage to maximise the rental income.