Should we sell our Buy to Let to pay off the mortgage on our home before interest rates rise?

N1_EP

Hi All,

I am going round and round in circles about whether to sell my buy to let flat to pay down our mortgage before our interest rates jumps up.  I would hugely appreciate your views on this. 

The facts are:

I own a buy to let property in London which I rent out.
Rental Income 1900 pm
Mortgage payments 551 pm (repayment)
Service Charge paid by me each month £150.
So I earn about £1.4k per month (pre tax) - my salary fluctuates as I am a freelancer. Sometimes I am high rate tax sometimes not. 
Outstanding mortgage on the flat is 68k
11 yrs left on mortgage. 
I bought it for 250k current value is likely 480k.
I used to live there so my CGT is reduced slightly if I sell. I will therefore walk away with approx £344k. (as calculated by my accountant).

My partner and I jointly own a house which we live in with our kids is likely valued about 1.1 or 1.2m 
We owe 600k remaining on the mortgage.
Our mortgage payments will jump from £2.4k per month (@ 1.5%)  to £3.6k (if interest is about 4.5% in Oct 25 when we must renew). 
We will really struggle to pay this. 
There are 19 years left on this mortgage.

So my crucial answer is. Should we sell the flat and hugely reduce our mortgage so we can focus on savings (we currently have none) or should I fight to keep the flat and we struggle but know we have an asset for retirement / university for kids. 

Many thanks, 

Bluebell1000

If you can't afford to pay the mortgage on your own home when interest goes up, then I would sell to prioritise keeping your house, and enjoying spending time with family rather than worrying about how to afford everything. There's always the option to downsize at retirement. It could be worth sitting down and working out a budget under different scenarios, to see how it might impact your overall income. 

Hoenir

Sell the flat. You've made a decent gain. 

Bookworm105

if you will struggle to ensure you meet the difference between £1.4 certain income and £3.6 certain outgoing each month because your employment income is variable then you have answered your own question regarding selling up 

shame you are now also exposed to potential tax changes in the budget having left it so late (although they may also help you decide...)

N1_EP

Thank you all for your input. I realise I was misleading in how I wrote down my facts. I meant from the flat alone I earn 1.4k - depending on how much I work I earn in the region of 60k per annum (including income from flat). My partner is on a higher salary. So between us we could afford the higher mortgage but it would be a stretch.

Neither one of us has a pension, we have always thought the flat would be our pension and hoped to build additional savings too.  If we sell the flat now and put it all into the house it feels like my provisions for our future are gone.  

[Deleted User]

In a similar situation I sold the BTL. Soon mortgage free on the main home as a result. Avoiding a hike in mortgage interest when the 5 Yr fix ends late 2025. A bonus was completion prior to likely CGT changes in this budget.

The BTL was once a great investment for me. Monthly profit. Huge capital increase not originally imagined. Yet, times change. Fixed rate or Stock and Share ISAs being tax free offer competitive returns now with no landlording required. BTL profits squeezed with mortgage interest rate rises and high tax.

Why go to all the effort of BTL when in order to facilitate this you will have to maintain an expensive mortgage on your own home. Less effort approach to sell up and reduce mortgage. For the same reward.

Overall, I am fairly convinced that the BTL was no longer promising the best  return for me. It didn't feel like it would be my pension. 

Sell the BTL and you would be heading towards having a small  mortgage against a 1.2m home. You can then take some steps to build pension.

N1_EP

Thank you [Deleted User] it's very helpful to hear from someone in a similar situation who made the choice to sell. 

FlorayG

N1_EP said:

Neither one of us has a pension, we have always thought the flat would be our pension and hoped to build additional savings too.  If we sell the flat now and put it all into the house it feels like my provisions for our future are gone.  

Well, no, because you then have a paid for house much more valuable than the flat, so when you retire you can sell the house and buy a flat or smaller house; so essentially you still have the pension pot. What you will lose is the rental income meanwhile, of course

RHemmings

In your situation I would sell the flat, pay down the mortgage, and look into improving the pension situation. 

But, I'm very debt adverse. So: take my 'vote' in that context. 

There's plenty of advice on here about how investing in pensions can be tax efficient and it is often recommended over buy-to-let. 

N1_EP

Thank you RHemmings.

I appreciate the advice re. pensions and looking at that. I find them confusing as a freelancer I don't get one with my job so I've always had the flat and felt that will take care of it. Time to get myself better informed I think. 

So far all people have told me to sell! this is really surprising to me I thought I'd be being told to fight to keep it.  I am not that financially knowledgeable so I appreciate having this guidance.

ian1246

N1_EP said:

Thank you all for your input. I realise I was misleading in how I wrote down my facts. I meant from the flat alone I earn 1.4k - depending on how much I work I earn in the region of 60k per annum (including income from flat). My partner is on a higher salary. So between us we could afford the higher mortgage but it would be a stretch.

Neither one of us has a pension, we have always thought the flat would be our pension and hoped to build additional savings too.  If we sell the flat now and put it all into the house it feels like my provisions for our future are gone.  

I think you absolutely need to sell the flat personally.

From where I'm stood, your pension provision, even if you retain the flat, sounds like its incredibly low vs. your combined income. I.e. a £450,000 flat value between 2 of you is only £225,000 each - for a couple used to earning £100,000+ a year? Alternatively £24,000ish a year income from it. Its better than a lot of people - but the thing is, do you not want to continue your life-style in retirement rather than have to massively cut it back? If so, you desperately need to up your pension provision!!!!

On the flip-side, you'll also be paying Tax on any revenue generated by your flat - after your £551 mortgage & £150 a month are deducted from the £1900 rent, that's £1,199 profit (not including other associated costs of being a landlord).

Factoring in 20% Tax on that's £959.20ish extra a month income it gives you - £11,510 a year.

£344,000 at 3.5% interest is £12,040 a year - so if you can secure a mortgage at only 3.5% a year and still retain your flat and therefore retain a £344,000 higher mortgage (vs. selling the flat and using the £344,000 equity to pay off the mortgage) your already worse off - not factoring in additional landlord expenses or the risk of vacant periods (or tenants not paying!).

Why not sell the flat, pour the equity into paying off your mortgage at the time of renewal and therefore only have a £256,000 mortgage, which will be around a £1539 mortgage a month.

You can then, at the bare minimum, sink the £861 a month (vs. current £2400 mortgage) into your pensions - if your a basic rate tax payer, £430 a month will equate to £516 a month into your pension (20% Tax Top-Up) whilst for your partner it will be £602 a month (40% tax top-up).

You say you would be able to afford the £3600 a month, but it would be a stretch? £3600 minus £1539 = £1961 difference in your mortgage payments. Wherever possible, why not put that amount into your pensions? £980.50 into your pension if basic rate tax payer will be £1176 a month, or for higher-rate £1372 a month.

So you could feasibly build a combined pension pot of £2548 a month (£30,576 a year) for the cost of £1961 a month, £23,532 a year, whilst simultaneously saving in excess of £12,040 a year on your residential mortgage interest and, as a bonus, not have the associated faff and costs associated with being a landlord.

That doesn't factor in compound returns on your pension (Whether cash only or investments).

I really would encourage you to look into pensions more or at least have a in-depth discussion with your accountant about the best way to build a pension pot if you do sell the flat.

N1_EP said:

Thank you RHemmings.

I appreciate the advice re. pensions and looking at that. I find them confusing as a freelancer I don't get one with my job so I've always had the flat and felt that will take care of it. Time to get myself better informed I think. 

So far all people have told me to sell! this is really surprising to me I thought I'd be being told to fight to keep it.  I am not that financially knowledgeable so I appreciate having this guidance.

N1_EP said:

Thank you RHemmings.

I appreciate the advice re. pensions and looking at that. I find them confusing as a freelancer I don't get one with my job so I've always had the flat and felt that will take care of it. Time to get myself better informed I think. 

So far all people have told me to sell! this is really surprising to me I thought I'd be being told to fight to keep it.  I am not that financially knowledgeable so I appreciate having this guidance.

Best way to think of pensions is you get any tax you pay on the pension amount, back, in the form of extra pension contributions from the government. So £500 as a basic rate tax payer becomes £600, or £700 if a higher rate tax-payer.

You can open your own pension with most investments (i.e. Vanguard) or high street banks and deposit contributions to it pretty much exactly the same way you would transfer money to a bank account. Only thing to decide, if doing investments, is what risk your willing to go for - keeping in mind the risk of inflation itself (I.e. a 2% inflation means £100,000 becomes worth only £98,000 next year, £96,040 the year after etc..) so any investments need to more than off-set inflation.