Buy to Let, still worth doing ?

[J4CKO]

Been pondering it for years and was never really in the position to do it but now my wife is working
and the kids are older have got to considering it again, my wife doesnt have a pension so was thinking this may be a better vehicle than a private pensions as we can take an income and then eventually transfer it to the kids.

We own our house outright so dont have a mortgage, nor any debt, we have some investments and a decent income, was thinking of starting off with a small property for around £100 - £120k, there are some good deals about in an area near us, plus they are putting in a new rail extension which makes the area more attractive for commuters into the city centre.

I get the impression that buy to let mortgages tend to make the whole thing not worth doing due to the interest being a lot higher, do we have to get a BTL mortgage ? we are a good bet for a lender for the reasons outlined above, we have perfect credit scores, equity, cash and income.

Theory is to pay for the house over the next twenty years whilst we are still working and potentially if able buy more.

[98elise]

If you are going for your first property, and you own your own home, then the best way is to remortgage your own home on an offset interest only mortgage.

The advantages are:

You do not need a deposit.
You will be on residential mortgage rates.
You can still offset the interest against tax.
The offset account is tax efficient for savings.
You will still have access to all your savings.
You will be a cash buyer.

I have a few BTL's and I funded my first this way.

BTL is still viable on BTL mortgages, but you really need to be looking at yields of 7% IMO. The are easier to get than residential mortgages, as they are view more as a business loan. They will be looking at rental cover etc rather than just your income.

Edited by 98elise on Monday 5th November 13:02

[megaphone]

Yes it can be worth it but you have to do your sums. You'll need a deposit, BTL mortgages often demand a higher %, so say £30-40K, do you have this? You have to factor in the interest or other investment potential you'll lose on this deposit.

Then work out the mortgage interest against rental income. You'll also need to factor in yearly costs, maintenance, insurance, major works. What happens if the place is empty for a couple of months? Aggravation as a landlord has to be factored in.

I personally don't think it's worth doing unless you are clearing a reasonable net profit as well as paying off the mortgage. Do not rely on a capital gain, any should be classed as a bonus.

[BoRED S2upid]

98elise said:

then the best way is to remortgage your own home on an offset interest only mortgage.

You can still offset the interest against tax.

Edited by 98elise on Monday 5th November 13:02

Really? I didn't know that. So he can remortgage his own house to buy the BTL and still reduce the tax he pays on the BTL by offsetting the mortgage on his home? I thought it was only the interest on the mortgage payments on the BTL that were allowed?

[megaphone]

BoRED S2upid said:

98elise said:

then the best way is to remortgage your own home on an offset interest only mortgage.

You can still offset the interest against tax.

Edited by 98elise on Monday 5th November 13:02

Really? I didn't know that. So he can remortgage his own house to buy the BTL and still reduce the tax he pays on the BTL by offsetting the mortgage on his home? I thought it was only the interest on the mortgage payments on the BTL that were allowed?

Plus the OP wants to buy a place over 20 years, an interest only would not achieve this.

[anonymous-user]

BoRED S2upid said:

Really? I didn't know that. So he can remortgage his own house to buy the BTL and still reduce the tax he pays on the BTL by offsetting the mortgage on his home? I thought it was only the interest on the mortgage payments on the BTL that were allowed?

The mortgage doesn't have to be on the actual BTL property, just so long as the mortgage you are claiming for was indeed used to buy the BTL. If you own your own house outright (or at least have a lot of equity in it) then you can usually get a better rate by doing it this way. Not everyone is comfortable with it though, as in theory there is a greater risk of you losing your own house if times get tough for any reason.

In response to the OP, yes you can still make money out of BTL, but you need more resources to get started (i.e. a bigger deposit) and you need to be cleverer than perhaps you used to be to make a good return.

[J4CKO]

I am thinking it is worth doing based on the comments, need to do my sums and ensure a decent contingency fund is in place, i.e. enough to pay the mortgage for a decent length of time just in case.

Potentially thinking of interest only and then if we have any windfalls/spare money paying off some of the capital, with the intention of it being paid for by the time we retire in 23 years (assuming we still can at 65).

Would be nice to have rental income split fifty fifty in retirement of a couple of grand a month and then be able to transfer ownership to the kids before we die but keep the income until we do.

[Newc]

J4CKO said:

then be able to transfer ownership to the kids before we die but keep the income until we do.

It doesn't sound like this is a major factor in your decision but it's worth pointing out that if you're thinking this approach will avoid IHT it won't - if you retain the income HMRC will view the property as still part of your estate.

[98elise]

megaphone said:

BoRED S2upid said:

98elise said:

then the best way is to remortgage your own home on an offset interest only mortgage.

You can still offset the interest against tax.

Edited by 98elise on Monday 5th November 13:02

Really? I didn't know that. So he can remortgage his own house to buy the BTL and still reduce the tax he pays on the BTL by offsetting the mortgage on his home? I thought it was only the interest on the mortgage payments on the BTL that were allowed?

Plus the OP wants to buy a place over 20 years, an interest only would not achieve this.

I should have been clearer, feed the profits back into the offset, + any existing savings. This will build your repayment fund quicker.

You never lose access to the money, so if you decide to buy the next property, you have a deposit on tap.

[98elise]

BoRED S2upid said:

98elise said:

then the best way is to remortgage your own home on an offset interest only mortgage.

You can still offset the interest against tax.

Edited by 98elise on Monday 5th November 13:02

Really? I didn't know that. So he can remortgage his own house to buy the BTL and still reduce the tax he pays on the BTL by offsetting the mortgage on his home? I thought it was only the interest on the mortgage payments on the BTL that were allowed?

Providing the BTL purchase is the reaaon for taking the loan. What you use to secure the loan isn't the important bit. Its what you use it for that counts.

[jonny70]

98elise said:

I should have been clearer, feed the profits back into the offset, + any existing savings. This will build your repayment fund quicker.

You never lose access to the money, so if you decide to buy the next property, you have a deposit on tap.

can you give me an example with figures as i find it a litttle confusing what you have written.

[cpas]

jonny70 said:

98elise said:

I should have been clearer, feed the profits back into the offset, + any existing savings. This will build your repayment fund quicker.

You never lose access to the money, so if you decide to buy the next property, you have a deposit on tap.

can you give me an example with figures as i find it a litttle confusing what you have written.

The offset part of the mortgage is basically a savings account which pays interest on savings at exactly the same rate as you pay on the mortgage, but the mortgage capital on paper stays the same. So, for example, if you have a £100k mortgage and are paying £1000 per month interest, and have £10k in savings, then £100 of you monthly payment will be transferred directly to your offset account - so you still make the same repayment amount but some gets transferred back to you. Therefore, if you make any profit on renting and use this account for all your savings, it will be possible to pay off an interest only mortgage after a period of time. Due to the way the interest is paid, it is tax free as well.

[cpas]

The other thing to do, apparently, is to sell up and move into your rental property when you want to sell it as then you will not be liable for any capital gains tax - this is not payable on your main residence which you can therefore sell, and the rental roperty then becomes your main residence. Also, if you do sell a rental property, you have a period of time (2 years I think) to buy another without paying capital gains. Obviously you would have to pay it on the whole lot eventually (unless you lived in it as my first point).

I've been looking into buying a BTL also, but BTL mortgages seem to be about 2% higher than standard ones, and also incur set-up fees of around £4k or 2.5%!! I'm in the position of almost owning outright a £225k house with an offset mortgage of half a percent above base rate (tracked), and can release up to £92.5K on this mortgage without question, so it seems a no-brainer to find an £80k or so rental property. What can possibly go wrong? We rented a property out a few years ago and made more on the increase in value over 8 years than we did on rental

[CaptainSlow]

cpas said:

The offset part of the mortgage is basically a savings account which pays interest on savings at exactly the same rate as you pay on the mortgage, but the mortgage capital on paper stays the same. So, for example, if you have a £100k mortgage and are paying £1000 per month interest, and have £10k in savings, then £100 of you monthly payment will be transferred directly to your offset account - so you still make the same repayment amount but some gets transferred back to you. Therefore, if you make any profit on renting and use this account for all your savings, it will be possible to pay off an interest only mortgage after a period of time. Due to the way the interest is paid, it is tax free as well.

So just to confirm for the hard of thinking (me) the interest on the gross loan can be used against rental income?

Why is the interest received tax free - is it assumed that the interest paid on the mortgage is paid from taxed income ie a normal resi mortgage? In this case it isn't so does that impact the treatment?

[98elise]

CaptainSlow said:

cpas said:

The offset part of the mortgage is basically a savings account which pays interest on savings at exactly the same rate as you pay on the mortgage, but the mortgage capital on paper stays the same. So, for example, if you have a £100k mortgage and are paying £1000 per month interest, and have £10k in savings, then £100 of you monthly payment will be transferred directly to your offset account - so you still make the same repayment amount but some gets transferred back to you. Therefore, if you make any profit on renting and use this account for all your savings, it will be possible to pay off an interest only mortgage after a period of time. Due to the way the interest is paid, it is tax free as well.

So just to confirm for the hard of thinking (me) the interest on the gross loan can be used against rental income?

Why is the interest received tax free - is it assumed that the interest paid on the mortgage is paid from taxed income ie a normal resi mortgage? In this case it isn't so does that impact the treatment?

Mine doesn't work like the above (if I've understood it). in my offset they simply take the mortgage, subtract the savings, and charge interest on the balance only.

The net effect is like receiving tax free interest on savings at the same rate as my mortgage.

[98elise]

jonny70 said:

98elise said:

I should have been clearer, feed the profits back into the offset, + any existing savings. This will build your repayment fund quicker.

You never lose access to the money, so if you decide to buy the next property, you have a deposit on tap.

can you give me an example with figures as i find it a litttle confusing what you have written.

say you finance the property with a 100% IO mortgage (secured against your own home) + an offset account.

Back of the fag packet calculations, Interest @ 3%, and the yield @7%. so you are making say net 4%, pay that into the offset each month.

@40% tax you will own the property in 26 years with no money of your own invested

@0% tax (say if your partner is not working) then you will own the propery in 16 years with no money of your own invested.

Obviously thats both ends of the tax scale, so there are a lot of variables inbetween so say the average would be about 20 years.

Thats without any rent rises (which would drop the term by few years), but also no interest rate rises. It also ignores any other costs like gas certs, insurance etc. I've purposely ignored management fee's as I manage my properties myself.

If you have a deposit, or savings to put in the offset, then this will drop the term considerably.

[CaptainSlow]

98elise said:

Mine doesn't work like the above (if I've understood it). in my offset they simply take the mortgage, subtract the savings, and charge interest on the balance only.

The net effect is like receiving tax free interest on savings at the same rate as my mortgage.

Ok that's clear. Depending on rates/amount of savings and tax rate it may be better not to have an offset.

[jonny70]

98elise said:

say you finance the property with a 100% IO mortgage (secured against your own home) + an offset account.

Back of the fag packet calculations, Interest @ 3%, and the yield @7%. so you are making say net 4%, pay that into the offset each month.

@40% tax you will own the property in 26 years with no money of your own invested

@0% tax (say if your partner is not working) then you will own the propery in 16 years with no money of your own invested.

Obviously thats both ends of the tax scale, so there are a lot of variables inbetween so say the average would be about 20 years.

Thats without any rent rises (which would drop the term by few years), but also no interest rate rises. It also ignores any other costs like gas certs, insurance etc. I've purposely ignored management fee's as I manage my properties myself.

If you have a deposit, or savings to put in the offset, then this will drop the term considerably.

So your own home is lets say worth 200k you have paid the mortgage off , so you do an offset and take 100k ,so you use that 100k for btl and have a 100k offset mortage on your home?

[cpas]

I may not have explained myself very clearly

Therefore:

http://www.santander.co.uk/csgs/Satellite?appID=ab...

But I'm pretty sure we pay a fixed amount every month and the balance is paid directly into our offset pot.

Edited by cpas on Wednesday 7th November 21:18

[Zingari]

I'm not too sure its all its cracked up to be. Take this example.

You can purchase a terraced house for £50k in a lot of areas (and some for less) but the rental is around £300pcm. So per year that's £3,600. Take off say £1k for insurance, repairs etc gives you £2,600 gross.

Now if you have £50k you can get 3% gross interest which give you £1,500 a year.

So you buy a house, rent it out and get a potential load of hassle for £1,100? I'm out.