Letting at a loss

landlady28

Hi, This is my first time on this forum and I've read some posts and am hoping some of you clever folk may be able to give me some useful advice. A year ago my husband and I decided to let out our old home on a buy to let remortgage (instead of selling it) to fund our move to our new family home. This was out of desperation more than a desire to build a property portfolio, as the housing market was so slow and the sudden arrival of our second child meant we desperately needed to move. My husband is self-employed and felt it would also be a good retirement nest egg.

All has been fine for a year, with a good tennant whose rent pays the interest-only mortgage payment, house insurance and british gas landlords cover. However, we have now received a letter saying our low rate mortgage is about to go up by about £150 per month (we knew this when we took it out, but were so keen to move we stupidly ignored it!). This means that we will be PAYING over £100 a month to rent out our house. And if the tennant moves out and we can't get another one straight away (and I think we'll struggle as we are already asking her to pay slightly over the odds) we would struggle seriously to cover the mortgage payments.

I feel like this house is a real burden and would like to put it on the market now before it crashes, but my husband wants to keep it as an investment.

Would the £150 a month we are paying for the house, plus the approx. £20k equity we have in it after mortgage fees etc be better invested elsewhere for retirement?

If we did sell, do we have to pay capital gains tax? How much would it be? Would we have to pay this even if the house hasn't gone up in value since last year?

Grateful for any advice.
Thanks

3under3

Hi Landlady 28,

We're in much the same boat, originally remortgaged our flat to put a deposit on a new home with the intent of keeping the old flat as an investment. Due to a change in circumstances (twins came along instead of the planned single baby) meaning OH had to give up their job. We're now debating whether we should sell the old flat and use the equity to reduce our mortgage payment or, keep the flat into retirement although to do this we will have to fund the repayment part of the mortgage ourselves. The letting of our flat will cover the interest of the mortgage but we still have to find insurance/service charge. Our dilemma is, will the interest saved on our new mortgage be worth more than the equity/income from the flat in say 20 years?

If you sell your flat now you won't pay any CGT as you have 3 years exemption in which to sell as you previously occupied it.

Alan_M_2

What it comes down to is the following:-

Can you afford to cover the cost of the mortgage long term including periods between tenants?

Can you afford any maintenance or upkeep on the property in the same period?

Is this a long term nest egg or a short term speculation in capital growth?

If answers to any of the above questions are creating any noticeable amount of stress, is the stress worth the possible return on the investment?

In reality the answer to your question has more to do with quality of life than hard financial facts. That's something only you can truly answer.

poppy10_2

landlady28 wrote: »

I feel like this house is a real burden and would like to put it on the market now before it crashes, but my husband wants to keep it as an investment.

An "investment" that costs you money each month and yet loses capital value is no investment at all. Tell him to stop being so silly.:money:

Sammy85_2

An "investment" that costs you money each month and yet loses capital value is no investment at all.

Surely this depends on the time frame being looked at? Yes it will probably lose capital in the next few years, but if its a long term investment then it may well increase again. Who knows what will happen in the next 20 years?

It was only 20 years ago that people were in negative equity with 15% interest rates, struggling to make ends meet. Im sure most who stuck it out will tell you it was worth it in the end, just a very hard slog at the time.

Landlady 28 - If you can be certain that you can meet all the costs associated with the property and do not intend to sell in the next 10 years or so then it may be worth sticking with it.

If you view this as long term, ie until the end of the mortgage period (im assuming at least 20years here) then my only concern would be about being interest-only mortgaged. IF the market were to never recover to the point at which it was when you bought the property, how would you pay back the capital? Unlikely i know, but you should consider all possibilities.

I would personally take a bigger monthly hit and go capital and interest repayments, then at least at the end of the mortgage period you can sell and have nothing to pay to the bank, or keep renting it out and pocket the cash each month.

As was said in an earlier post, if its going to cause you stress as well as money each month, is it really worth it? Stick that extra cash each month in an ISA instead!

Simone76

landlady28 wrote: »

All has been fine for a year, with a good tennant whose rent pays the interest-only mortgage payment, house insurance and british gas landlords cover.

If you are having an interest-only mortgage, then it's not really an investment, I would say.
You are renting from the bank to sublet at a lower rent, making a loss.
As you are not paying back the capital, it would require your family to either cough up a lot more money in future years to get the capital paid back and actually have an investments whose yield/rent is all yours when retiring or you gamble on an even more massive houseprice inflation than the one the UK just left.

inmypocketnottheirs

poppy10 wrote: »

An "investment" that costs you money each month and yet loses capital value is no investment at all. Tell him to stop being so silly.:money:

What a bit like my Scottish Widows pension you mean?

Trollfever

Have you prepared cashflow forecasts for the business that you are running?

This will help to quantify how long that you can afford to support a loss making business.

teabelly

Talk to a mortgage broker and see what deals are around. The rates are pretty poor at the moment. Also ltvs are around 80% rather than 85% for most lenders. Some are 75% so you could be quite restricted.

In your shoes I'd probably stick with the svr until the lending situation improves. It may take 6-9 months but you should be able to fix for 3-5 years after that if you plan to keep the house. Right now there isn't much capital to be made but all the current problems will blow over eventually.

obsessed_saver

Simone76 wrote: »

If you are having an interest-only mortgage, then it's not really an investment, I would say.
You are renting from the bank to sublet at a lower rent, making a loss.
As you are not paying back the capital, it would require your family to either cough up a lot more money in future years to get the capital paid back and actually have an investments whose yield/rent is all yours when retiring or you gamble on an even more massive houseprice inflation than the one the UK just left.

I agree with Simone on this one. It's not a good investment as you are not even on a repayment mortgage. This just shows that it doesn't make sense in your case to have the BTL.

At this point in your life with a new family, you need to make sure you consolidate and secure a firm financial foundation. You should not be going out on a limb and putting your finances (and homes) at risk.

Sell the property and put the extra money into your home or a savings account. Think about BTL when you are a bit more secure and not worried about an extra £100 or £200.