taking equity from house, renting it, and buying another?

moonbeam_4

How do my partner and I do this?

We have a property each and would like to release most of the equity in these to put towards a home together, renting out the other 2 to cover the mortgage.

Someone told me we should change the 2 mortgages from repayment to interest only if we're doing this. Is this right and what does that mean we must do to repay the capital?

Property 1 is valued at £150k and has a £75k mortgage
Property 2 is vlaued at £150k and has a £60k mortgage
Proprty 3 - we're looking around the £350-£400k mark and using mortgage calculators on building society websites we could borrow £260k reasonably comfortably.

Both property 1 and 2 should easily rent in this area for £550pcm if that makes a difference?!

How does it work? Do you think we'd be best getting ourselves a proper IFA/mortgage broker to help us out?

Thank you in advance

Fred

By the questions you are asking, you sound pretty inexperienced. No offense, but somebody to guide you through the process would not be bad. Could be somebody who lets houses in the areas your 1&2 are in, not nec a IFA.

You move to interest only because of tax - rental income less interest payments is taxable. Repayment part of a repayment mortg would still be taxable as it is essentially income that you spend on repaying. But presumably, if repaying you would prefer your residence to be repaid. You will ultimately repay the capital by selling the houses - provided that you will be able to sell for more than your mortgages are for.

Going as high as possible with the mortgages on 1&2 makes sense because you can stomach high interest payments as long as you have the rent to support this of course. The capital you can release will help you towards your new house because in your residence you will of course not be able to deduct interest payments from your income tax. And you will not have to worry much about taxable rental income. How much you can release usually depends on the lender and the ratio between rental potential and mortgage. Often, lenders say that rental income per y must be 130% of interest payments per y - usually taking the standard variable rate rather than the discount. With 550 income, you will be looking at mortgage payments of about 420 pounds. How much equity release that supports will depend on the lender&deal available.

A whole different ballgame is capital gains. I would have thought your economic motive for doing this is capital gains, which is of course a bit of a gamble. For this you will want advice as it is quite complicated. Simply speaking, you will be able to take into account the fact that you once lived in the properties yourself to bring down the amount that is taxable when you come to sell up, add to this other forms of relief basically depending on the length of time you kept the property. But you will end up paying tax - with property this is almost always 40% because you only pay the tax when you sell up.

And yet another different ballgame is how to manage the properties. Where I live, a fully managing letting agent takes 15% plus tradespeople and stuff. Be clear about this in practice - who is going to answer the phone when the boiler goes? Who is going to clean up between tenants and so on and so forth.

In your situation, I might be tempted to sell one and keep one house. If you don't like the hassle you can then sell up within the first couple of years tax free (provided you have lived in the house for a certain amount of time). Being a landlord comes with all sorts of legal and practical duties and is not a way to quick money.

Fred