Mortgage quandary (BTL mortgage vs releasing equity)

[F30]

We’re currently with Santander with a 30 year term remaining. Our fixed rate is due to expire in July. I've had a quick look and there are a number of rates on comparison websites which would save us ~£100 per month when it comes to renewing (incl Santander’s own rate).

Hoping someone else has been in a similar position or could offer some advice.

Thanks

Edited by B9 on Friday 20th July 11:04

[Rovinghawk]

You do know that tax relief on finance costs is being phased out? By the time you get to buy this will be well in progress.

[covmutley]

So your investment is making a very poor 1% per annum. You are basically betting that the property value will go up to create a long term saving/pensions pot. But higher property prices has been a good bet historically.

I would save yourself all the bother, pay a chunk off the mortgage (saving interest payments) and dump more cash into pensions to get the 20%/40% tax saving. From a simplistic perspective, you would be 19%/39% 'up' at the start in a pension compared to buying the BTL!

[F30]

My understanding was that previously you'd take the mortgage interest off the rental income, and pay tax on your 'profit'.

So previously you'd have a £500 income and a £250 mortgage interest - Your profit (£250) is all you had to pay tax on (£100 @ 40%), leaving you with £150.

In a few years time you'll have to pay tax on the full income of £500 (£200 @ 40%), and you can then claim 20% tax relief on the £250 mortgage interest (£50).

So in the new world, you'll be worse off as you'd have a £500 income, but pay £250 interest, £200 tax but receive £50 tax relief (leaving you with £100)

[mackay45]

covmutley said:

So your investment is making a very poor 1% per annum.

But a repayment mortgage, not interest only according to OP, so return is higher than 1% per annum (but may still not be great).

That's all the input I can offer I'm afraid. OP have you done anything in terms of trying to model the various options in excel?

[covmutley]

mackay45 said:

But a repayment mortgage, not interest only according to OP, so return is higher than 1% per annum (but may still not be great).

Quite right, i suppose the OP would have to give the yield for a fair comparison. My main point was that it seems to be for long term savings (like a pension), rather than income.

[anonymous-user]

covmutley said:

So your investment is making a very poor 1% per annum. You are basically betting that the property value will go up to create a long term saving/pensions pot. But higher property prices has been a good bet historically.

I would save yourself all the bother, pay a chunk off the mortgage (saving interest payments) and dump more cash into pensions to get the 20%/40% tax saving. From a simplistic perspective, you would be 19%/39% 'up' at the start in a pension compared to buying the BTL!

I was looking into buying another property and this is the same conclusion I came to. Add in the amount of stamp duty to pay on a second property plus the amount of tax you will pay from the rent then I am not sure it is a good investment.

I also don't think the economy is quite as healthy as we are led to believe and with potential interest rates on the horizon I don't think I want to gamble on property values going up over the next few years.

[covmutley]

Well if you are maxing out pension and would still have a rainy day fund, then you cant really go wrong I guess. As you suggest, some diversity is always good too!

Plus you could always sell the property if your plans changed.

But I think you would be crazy to add to your personal mortgage to fund it. Surely if you are planning for the future, a future with no mortgage payments would be very nice indeed!.

Edited by covmutley on Wednesday 21st February 13:40

[NickCQ]

F30 said:

And besides, there's easily as much risk associated with the pension than there is property.

This is a bit of a generalisation and, if you don't mind me saying, almost meaningless.

If you just have the one BTL property, your entire exposure is correlated to one local residential property market. With a pension, you could invest in multiple asset classes in multiple countries - that diversification should allow you to lower the risk taken.

In addition, more likely that not, the investments in your pension will be less leveraged that your 75% LTV BTL property.

[mike74]

So much for the govt supposedly trying to deter the over leveraged, amateur, wannabe property entrepreneur.

[mikeh501]

The BTL shouldnt really have much of a bearing on your ability to get funding on your own home. Its more to do with the rent (following stress test 5.5% 145% coverage) being able to cover your mortgage outgoings. 75% LTV would be an absolute max id guess, unless your going to get 600+ for your 125k BTL.

As for whether to do equity release or a BTL mortgage. One thing id consider is that one is your home, and the other an investment. If everything went tits up at least your own property isnt hugely leveraged. Id rather have that mortgage charge against the BTL.

My strategy is similar to yours for pension with BTL property being a component part. Once the mortgages are paid down your left with a decent amount of cash, or an income generator.