Downletting could be the new downsizing, says ARLA

by Property118.com News Team

20:53 PM, 14th December 2011
About 8 years ago

Downletting could be the new downsizing, says ARLA

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Downletting could be the new downsizing, says ARLA

News Sourced by Property118


Downletting is the new way to raise cash from a home that you can’t sell, according to letting agents.

Many homeowners have problems selling large properties because buyers cannot raise deposits or mortgages, which means they cannot move on.

To solve the problem, letting agents propose owners can let their homes and use part of the funds to finance renting a smaller property to live in and pocket the rest of the cash as income to boost their earnings.

The process has the same result as downsizing by selling, say letting agents.

“With many potential buyers struggling to secure a mortgage, letting your family home rather than selling offers a strong alternative,” said Tim Hyatt, president of the Association of Residential Letting Agents (ARLA).

“Rental returns stand at an average of 6.1% this year. This substantially beats the returns on many other current investment opportunities.

“ARLA members also report that achievable rent levels are increasing, while demand for good quality rental properties remains high. While market conditions remain so inclined, it could be prudent to let out the family home, and use the monthly rental income to invest in renting a smaller retirement home.”

Downletters have to consider renting out a home will incur some costs, like tax on rental profits, letting agent fees, insurance and repairs.

HM Revenue & Customs’ rent-a-room scheme can also earn downletters tax-free cash of up to £4,250 a year.

Householders can take in a lodger and pick up £81 a week rent without paying any tax or even submitting a tax return.

The scheme is open to owners and tenants – providing the tenants have permission to sublet.

Meanwhile, figures from the Council of Mortgage Lenders show homeowners are releasing less equity from their properties than at any time over the past 20 years.

The findings reveal owners have paid back £93 billion in mortgage debt since 2007. They put the rise down to falling prices reducing equity.

 

 



Comments

21:41 PM, 14th December 2011
About 8 years ago

This could be an ideal solution for elderly people who need to downsize but don't wish to sell in a depressed market.
The properties tend to be large properties which are ideal for families where there is a deart of suitable rental accommodation for families presently.
These elderly landlords would then be able to rent a smaller and probably a more suitable property.
They would most likely find an uplift tin their monthly income aswell.
They might aswell sweat their asset(their house) for as much as they can as it is pretty pointless having little income but a valuable asset which could generate useful income.

Roy B

9:16 AM, 20th December 2011
About 8 years ago

1st thoughts - Capital gains taxes?

Mark Alexander

9:20 AM, 20th December 2011
About 8 years ago

I'm not sure I understand your question Roy, please clarify.

9:45 AM, 20th December 2011
About 8 years ago

I commented under the 'euro law' section already. I wonder under the proposed new euro laws, would the income from the rented out house be seen as income and seen to cover the loan on the existing house or not? Even though the person concerned would be taking out a resedential mortgage when they secured their next house, would any existing loans be seen not to be covered by rental income as part of the overall calculation on the new mortgage? I know little about this - this is more of a reaction comment!

Mark Alexander

11:40 AM, 20th December 2011
About 8 years ago

It's a good question Gareth and I suspect the answer will be the one we don't want if the proposed legislation becomes reality.

Ian Ringrose

12:06 PM, 20th December 2011
About 8 years ago

The first 3 years of renting of a forming PPR is free of capital gains tax, and then there is rental relief as well for former PPR. I worked out that we would need to get a VERY nice capital gain before it become an issue on my former home, as I lived in it for a long time before renting it out. (A capital gains tax problem on my wife’s ex home would be a dream come true!)

Hopefully one of the accountants her will expand on this and provide examples of the detailed maths.

There is also no capital gain tax on death, so for older people it may not be an issue at all.

Ian Ringrose

12:08 PM, 20th December 2011
About 8 years ago

If only the tax system would make this worthwhile, while full income tax has to be paid on the rental income without the “landlord” being able to offset the rent on cheaper property.

Just having to pay two set of agent charges and cope with voids is enough to require a very big downsizing to give any cash flow benefits.

Ian Ringrose

12:12 PM, 20th December 2011
About 8 years ago

If the income required is worked out on current interest rates with a little added for safety, then I expect a lot of people will not have an issue on income cover for the two mortgages due to the current practical limits on LTV. Also I don’t think a single rental income should be taken into account, as there are so many possible issues with voids etc.

Ian Ringrose

12:17 PM, 20th December 2011
About 8 years ago

When we did this, we had one BTL mortgage vendor refuse to lend to us, as we were not “owner occupier” as we were living in a rental while looking for a property to buy. (We moved due to jobs and getting married etc.)

That fact we would be owner occupier on the date we completed was not good enough for them. They would have been happy to give us a “Rent to Buy” mortgage if we were renting but had our former homes empty! (Provided the address on our bank statements had not been changed)

Mark Alexander

12:20 PM, 20th December 2011
About 8 years ago

Hi Ian - PPR? Principal Private Residence? We must all learn to add detail to abbreviations as we are confusing a lot of newbies. I concur with your analysis of the tax position. I always suggest getting a valuation at the point of moving out and another on the third anniversary of doing so as it could help with future challenges from the tax man.

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