Change home to BTL or do something else with the equity?
Discussion
I'm looking for a bit of advice from people with experience in BTL investments.
For a number of personal reasons my wife and I want to move house to be closer to her family. We don't need to sell our home to make this happen as we can live in a property owned by my wife's parents, so we're considering converting our home to a BTL property. I'm just starting out down this road and have been doing lot of reading over the last couple of days, we are definitely going to get some independent financial advice but I wanted to bounce the idea around to make sure we're not being completely insane first.
We've done very well on the house so far. It's a two bed bungalow on a nice street which is 15 minutes walk/3 minutes drive from a mainline station to London with a 55 minute journey time to Paddington and it's also in a good school catchment. The agents tell us that there is massive demand and very little supply for properties like ours and with bungalows not being built and an ageing population they think it's one of the best long-term bets there is in the market at the moment. This makes us want to retain it as a solid long term investment.
We've just had the place valued and we can walk away after fees with a lump sum of circa £220k to invest elsewhere, or we can hold onto the house and rent it out.
The house is valued at £350k and has an outstanding mortgage of £123k.
Estimated rental value is £1100-£1200pcm.
Taking the lower rental figure and assuming two months a year empty that's an annual gross rental income of £11,000.
An interest-only BTL mortgage on £123k currently comes in at about £2520 a year.
Agency fees are 7% - so estimate £770 based on £11k rental income.
Landlord insurance is circa £600 a year for an all-the-bells-and-whistles policy including rent protection.
My wife isn't a higher rate tax payer and works part-time, so the property could be in her name giving us full mortgage interest tax relief on the payments even with the recent changes. From a very rough calculation on that basis it looks like there will be circa £1500 of income tax to pay a year.
So after taxes and being cautious about occupancy levels that's a net rental income of £5600 a year to cover maintenance and all the other costs.
The idea would be to use most of the money to build up an investment to clear the capital as quickly as possible while keeping a maintenance slush fund. In reality after all of the expenses it wouldn't be providing any actual income but we don't need it to as we're looking for a longer term return not an income. We would be able to cope with even quite substantial mortgage rate increases and drops in market value without being forced to sell.
Obviously the big bet here is on rising property values, which would be great, but we're not relying on it happening.
CGT would be an issue if we come to sell, but I understand that we get relief on that for the time we've been living here, so effectively would pay it on any price rise over £350k, not on the increase from the £250k we originally bought the house for.
So in a nutshell, and accepting I've missed out a few potentially expensive start-up fees like mortgage arrangement costs, have I missed or got anything major wrong in my assumptions here?
In the current climate is there anything better to do with our £220k of equity? I'm all for a McLaren 650S and a lot of cocaine and hookers, but apparently that's not an option.
If you've got this far, thanks for reading and any advice is gratefully accepted. This has all come about very quickly so I'm still getting my head around all the implications, hence the rather breathless cry for help. We have a few months before any concrete decisions have to be made so there is enough time to cover all the angles.
For a number of personal reasons my wife and I want to move house to be closer to her family. We don't need to sell our home to make this happen as we can live in a property owned by my wife's parents, so we're considering converting our home to a BTL property. I'm just starting out down this road and have been doing lot of reading over the last couple of days, we are definitely going to get some independent financial advice but I wanted to bounce the idea around to make sure we're not being completely insane first.
We've done very well on the house so far. It's a two bed bungalow on a nice street which is 15 minutes walk/3 minutes drive from a mainline station to London with a 55 minute journey time to Paddington and it's also in a good school catchment. The agents tell us that there is massive demand and very little supply for properties like ours and with bungalows not being built and an ageing population they think it's one of the best long-term bets there is in the market at the moment. This makes us want to retain it as a solid long term investment.
We've just had the place valued and we can walk away after fees with a lump sum of circa £220k to invest elsewhere, or we can hold onto the house and rent it out.
The house is valued at £350k and has an outstanding mortgage of £123k.
Estimated rental value is £1100-£1200pcm.
Taking the lower rental figure and assuming two months a year empty that's an annual gross rental income of £11,000.
An interest-only BTL mortgage on £123k currently comes in at about £2520 a year.
Agency fees are 7% - so estimate £770 based on £11k rental income.
Landlord insurance is circa £600 a year for an all-the-bells-and-whistles policy including rent protection.
My wife isn't a higher rate tax payer and works part-time, so the property could be in her name giving us full mortgage interest tax relief on the payments even with the recent changes. From a very rough calculation on that basis it looks like there will be circa £1500 of income tax to pay a year.
So after taxes and being cautious about occupancy levels that's a net rental income of £5600 a year to cover maintenance and all the other costs.
The idea would be to use most of the money to build up an investment to clear the capital as quickly as possible while keeping a maintenance slush fund. In reality after all of the expenses it wouldn't be providing any actual income but we don't need it to as we're looking for a longer term return not an income. We would be able to cope with even quite substantial mortgage rate increases and drops in market value without being forced to sell.
Obviously the big bet here is on rising property values, which would be great, but we're not relying on it happening.
CGT would be an issue if we come to sell, but I understand that we get relief on that for the time we've been living here, so effectively would pay it on any price rise over £350k, not on the increase from the £250k we originally bought the house for.
So in a nutshell, and accepting I've missed out a few potentially expensive start-up fees like mortgage arrangement costs, have I missed or got anything major wrong in my assumptions here?
In the current climate is there anything better to do with our £220k of equity? I'm all for a McLaren 650S and a lot of cocaine and hookers, but apparently that's not an option.
If you've got this far, thanks for reading and any advice is gratefully accepted. This has all come about very quickly so I'm still getting my head around all the implications, hence the rather breathless cry for help. We have a few months before any concrete decisions have to be made so there is enough time to cover all the angles.
You will struggle to get a BTL mortgage (it's actually a Let-To-Buy mortgage you need as you already own the property) where there isn't going to be an onward purchase, in the same way as it's difficult to source a lender for a FTB'er wanting to buy a BTL property. There are a small number of lenders who will do it, but it depends on your circumstances and income levels.....
Interesting, that seems a bit strange, what difference does it make to the lender whether we're buying another house or not? It wouldn't matter in a conventional BTL scenario because that's just a straight purchase for letting. Maybe my terminology is off on the mortgage given we're not really buying to let as such.
Sounds like a decent broker might be in order if that's the case.
Sounds like a decent broker might be in order if that's the case.
charltjr said:
Interesting, that seems a bit strange, what difference does it make to the lender whether we're buying another house or not? It wouldn't matter in a conventional BTL scenario because that's just a straight purchase for letting. Maybe my terminology is off on the mortgage given we're not really buying to let as such.
Sounds like a decent broker might be in order if that's the case.
One of the first major criteria points for a BTL mortgage is; "Are you a Residential Property owner"........Sounds like a decent broker might be in order if that's the case.
In this scenario, you would be going from a Residential property owner to a tenant in a family owned property.
Also, as mentioned previously, this would be a LTB not a BTL.
As I said, it can be done with the right circumstances, but don't just look a comparison site figures for BTL's and think they'll lend to you.
In most instances there'll need to be a minimum single income of £25k+.........
Thanks, much appreciated. That wouldn't be a problem on my income, but would I be right in saying that as the property would be solely in my wife's name she would need to have that level of income?
I wonder if the better option would be to use the equity to buy somewhere outright and rent that out, less to offset against the tax bill but then a lot less to pay out in the first place.
I wonder if the better option would be to use the equity to buy somewhere outright and rent that out, less to offset against the tax bill but then a lot less to pay out in the first place.
charltjr said:
Thanks, much appreciated. That wouldn't be a problem on my income, but would I be right in saying that as the property would be solely in my wife's name she would need to have that level of income?
I wonder if the better option would be to use the equity to buy somewhere outright and rent that out, less to offset against the tax bill but then a lot less to pay out in the first place.
Yes, whoever owns the property will need that level of income.....you can be named on the property but apportion the income to your wife, naturally, a conversation with an Accountant would clarify that for you......I wonder if the better option would be to use the equity to buy somewhere outright and rent that out, less to offset against the tax bill but then a lot less to pay out in the first place.
charltjr said:
CGT would be an issue if we come to sell, but I understand that we get relief on that for the time we've been living here, so effectively would pay it on any price rise over £350k, not on the increase from the £250k we originally bought the house for.
Edit: you also get a CGT exemption for 18 months after you move out - so it is still considered your main residence during that time.
Edited by mudster on Sunday 10th April 13:16
^^ That's a good point. Although there may be some out there with a broader knowledge many IFAs have been trained in a very narrow field. Just because the letters IFA include the word "Financial" doesn't mean they are fully up to speed on all the intricate ins and outs of the astoundingly complex UK tax system. Alarmingly, few people at HMRC understand it these days....
Yes I've been doing a bit more reading on CGT and it is definitely more complex than I thought at first sight. Once we've lived somewhere else for more than 18 months with the property let out the relief is reduced on a scale based on how long we've lived away vs how long we've owned the property.
The example on the HMRC website is if someone has owned a property for 20 years in total and rented it out for five of those years. That reduces the relief by 25% based on 1/4 of the ownership having been taken up by rental.
As we've not been here very long (two and a half years) the CGT relief would be eroded very quickly and the vast majority would then be payable at 28%. Ouch.
It's looking more and more like getting the equity out through a straight sale and re-investing it is the way to go. Also that would mean we wouldn't have any issues with emotional attachment to the property. Early days though, professional advice definitely needed.
The example on the HMRC website is if someone has owned a property for 20 years in total and rented it out for five of those years. That reduces the relief by 25% based on 1/4 of the ownership having been taken up by rental.
As we've not been here very long (two and a half years) the CGT relief would be eroded very quickly and the vast majority would then be payable at 28%. Ouch.
It's looking more and more like getting the equity out through a straight sale and re-investing it is the way to go. Also that would mean we wouldn't have any issues with emotional attachment to the property. Early days though, professional advice definitely needed.
Rangeroverover said:
Unless you have another property you own/or have mortgage on you will not find a lender willing to lend. Best bet is to change lenders on a normal resi mortgage that will give you "permission to let".
When we got married I lived in my wife's house and let my house.I had a normal interest only mortgage with Nationwide who gave me "permission to let",subject to all the simple stuff like insurance,agent etc.All I had to do is renew it every year,went on for years without any fuss until I sold the property. Rangeroverover said:
Unless you have another property you own/or have mortgage on you will not find a lender willing to lend. Best bet is to change lenders on a normal resi mortgage that will give you "permission to let".
Incorrect.I do wish people wouldn't give out incorrect "advice".............
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