Buy to let or remortgage my home?

by Readers Question

4 years ago

Buy to let or remortgage my home?

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Buy to let or remortgage my home?

I am renting out a flat with a mortgage of £100k which has come to the end of it’s latest deal. I have another mortgage on the house I live in which is £200k and it’s worth £350k. Buy to let or remortgage my home?

I have been doing some sums and it appears that if I take the £100k mortgage from the flat and add this to my house (let’s assume affordability isn’t a problem) leaving no mortgage on the flat and £300k on the house, then I think I’ll actually be better off. This is due to the interest against the new loan being a lot less than with a BTL rate and even after taking into account the tax deductions.

So I’m left wondering if I’ve totally missed something as everyone says to mortgage BTL properties up to hilt so you have more to offset against the tax from the rental income. Or does this sound like a good plan?

Thanks

James



Comments

Mark Alexander

4 years ago

Hi James

I'm pleased to say that in this instance you can have your cake and eat it.

If you can prove to the HMRC that the extra £100,000 raised by remortgaging your home was used to fund your BTL property business then you can also offset that element of the mortgage interest against your rental profits 🙂

There nothing to stop you remortgaging your BTL property to the hilt in order to fund deposits on more BTL properties either if you want to. You need a strategy though and I can help you with that. I suggest you read a series of articles I've written here >>> http://www.property118.com/learning-from-experience/61558/
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John Constant

4 years ago

Two points to make. Firstly you will be putting all your eggs in one basket as far as your residential is concerned. Remember that is the roof over your head. Second point is that if you capital raise on your residential, you will in all probability be on a capital repayment mortgage rather than interest only as many landlords prefer. A standard btl will avoid both of these pitfalls.

John Constant

4 years ago

One other comment. Perhaps you need the services of a good mortgage broker to get the best rates for your BTL; please take a look at my profile.

You do get tax relief on the interest of your BTL which I'm not sure you'll get on your domestic mortgage.

Adam Davies

4 years ago

Agree with Gillian.

Unless you have a significantly better rate on your house in which you live, I would have thought it is always more cost-effective to have your home mortgage-free and have your buy-to-let's mortgaged.

This way you can offset the mortgage interest against your rental profits.

By having a 300k BTL mortgage (at a mortgage rate of 3.5% for arguments sake), that is a payment of £875/month which is tax deductible.

However, if you have a 300k residential mortgage for your home, which I assume you would have a repayment mortgage, you will be paying around £1420/month (based on a slightly lower rate of 3% because of residential) and no tax relief from your rental property.

Seems a clear decision to me, but please let me know if I have misunderstood.

Romain Garcin

4 years ago

Reply to the comment left by "Adam Davies" at "07/10/2014 - 22:37":

As per Mark's comment, the interests on a mortgage (or any other loan) are allowable expenses as long as the mortgage is used to finance the rental business.

As such, if you mortgage your home on a standard residential mortgage and use the money to fund a BTL property then the interests and all financing costs are allowable expenses.

Mark Alexander

4 years ago

I am quite surprised at the level of confusion over what, when and why interest paid out can be offset against rental profits. Romain has provided the best explanation so far.

The important thing is not what type of loan it is or whether or not the loan is secured against a property. It is the PURPOSE OF LOAN which HMRC will look into to determine whether interest can be offset against rental profits.
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John's point of interest only versus capital repayment is an excellent reply, in my opinion, It's not always about the interest rate or tax implications, but also it can often be about cashflow too. If raising the money against your resi home means you have to repay the mortgage (sometimes on a much shorter term) on a capital and interest repayment basis, then this will eat far more in to the current monthly cash flow than if the mortgage was retained against the BTL property on a long term I/O basis.

Horses for courses, but I prefer money now (to allow for flexibility today) than possible repayment of debt at some time in the future with less income during the meantime.


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