Maximising Cheap Mortgage Funds

Maximising Cheap Mortgage Funds

9:29 AM, 28th January 2014, About 8 years ago 14

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Hello All,

Just a quick one.

I’m keen to get some opinions on the way forward.

I currently have one buy to let, Value £120,000 , Mort £100,000 and I would like another one /two. The thing is, I have a flexible openplan residential mortgage (£70,000 outstanding) with access to around £50,000 of borrowing at very low interest (1.35%).

I am considering using this for a deposit on one or two buy to lets and I am interested in other landlords opinions on this method. Maximising Cheap Mortgage Funds

Thanks

DB



Comments

by Mark Alexander

9:35 AM, 28th January 2014, About 8 years ago

If you can borrow money at that rate you would be crazy not to!

Word of catution though, I think access to Open Plan mortgage drawdowns may have been closed so please check into that before you get too excited.

If the money is still available I would get it out ASAP if I were you.

By shopping around you should be able to find a better rate than the rate you are paying. HMRC might suggest you can't claim tax relief on the cash unless you use it to re-invest. If that happens, point out intent. If the money is sitting in a seperate account and you haven't spent it personally it is easy to argue that your rationalle for borrowing the cheap money was to do so whilst it was available at that rate and it is your "INTENT" to reinvest it. If you decide to spend the money on anything other than property you must immediately cease offsetting the extra interest against you rental profits of course.

Now to turn to buying. Please remember to leave yourself with a liquidity reserve. I have documented my property investment strategy in a series of 14 blogs which I hope you will find useful at this stage, please see >>> http://www.property118.com/how-to-become-a-landlord/60765/
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by D B

13:51 PM, 28th January 2014, About 8 years ago

Hello Mark

Thank you for your response.

I have checked the open plan position and yes, the access to £50,000 is still available. The open plan mortgage is on my own home and not the buy to let ( just to confirm).

What strategy would you use in this position? I was looking at a 2 bed semi at around £100000. I could put £25000 down from my open plan mortgage and have a buy to let mortgage of £75000.
Rent in my area would be around £500 pcm. Or is there a better way to do this ?

Thanks

by DC

10:41 AM, 29th January 2014, About 8 years ago

Reply to the comment left by "Mark Alexander" at "28/01/2014 - 09:35":

Mark, Why can't tax relief be claimed in these circumstances ?

by Mark Alexander

12:00 PM, 29th January 2014, About 8 years ago

Reply to the comment left by "DC " at "29/01/2014 - 10:41":

Can you be a bit more specific please?

I think I said tax relief could be claimed so I'm interested to understand which part of my post was unclear.
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by Mark Alexander

12:07 PM, 29th January 2014, About 8 years ago

OK, I have now re-read what I've said so I will expand.

If the money raised is reinvested into property the interest payable can be offset against rental profits.

If the money raised is held on deposit with the intention of reinvesting into property the interest payable can be offset against rental profits.

If the money raised is spent on anything other than rental property the interest payable can be only offset against rental profits for the proportion of the debt which does not exceed the original purchase price of the property.

For example, if you paid £100k for a property and had a £75k mortgage and now refinanced to 75% of an increased value of £200k that would raise an extra £75k. If you go and buy a flash car with that money you can only offset interest on £25k against rental profits. However, if you invest the £75k into buying more BTL properties or refurbishing existing ones then you can offset the interest on the whole £75k against your rental profits.

Is that better?
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by DC

14:33 PM, 29th January 2014, About 8 years ago

Mark,
Yes, your initial comments were a bit of a red herring as I assumed you had a little more info than DB’s original post showed as there was no mention by DB that he was drawing more money down than the original purchase price of the property.

Now that you have included that crucial point, "...interest payable can be only offset against rental profits for the proportion of the debt which does not exceed the original purchase price...", it will make sense to those that weren’t aware of your important point on offsetting against income tax in these circs.

DB,
As Mark says, it would be silly not to make the most of that very low interest rate because we may never see the likes of it again within our lifetime.

If you have sufficient contingency money to cover yourself against any financial problems and if you have carried out sufficient due diligence then it may make sense to consider utilising enough of the available money to purchase two properties now.

If you are able to buy below true market value that would be a bonus and assuming they will be in an area where values are on the rise then consider short term fixed rate BTL mortgages with a view to looking to release your own money by remortgaging in the not too distant future.

This method may not be everyones cup of tea but by obtaining the correct advice from suitably qualified people, available through Property 118, would definitely be worth considering in your circs.

by Jerry Jones

15:35 PM, 29th January 2014, About 8 years ago

By the way, you can aggregate the values of all properties in a portfolio and borrow against them up to the total while claiming tax relief - not just on a prop by prop basis. I used that a couple of years back to cut my tax due, after an exchange of letters with HMRC allowed it. What I must do, though, is to draw up records as to how much borrowing went on further deposits and refurbishment.

by Mark Alexander

16:04 PM, 29th January 2014, About 8 years ago

Reply to the comment left by "Jerry Jones" at "29/01/2014 - 15:35":

Sorry Jerry, you have totally lost me there, exaggerating the purchase price of a property or falsely declaring expenses to HMRC are both criminal offences. Maybe I have misunderstood what you were trying to say?
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by D B

16:44 PM, 29th January 2014, About 8 years ago

Thanks for all of your help mark /DC .
We seem to have gone off topic a bit but that's fine . My main question being 'should I raise a deposit from my open plan mortgage to fund a but to let' has been answered. And I like DCs idea of remortgaging in a few years to release the money back.

by Jerry Jones

17:05 PM, 29th January 2014, About 8 years ago

Reply to the comment left by "Mark Alexander" at "29/01/2014 - 16:04":

I am neither an idiot nor a criminal - let me try again to explain:

When doing as you suggest, and claiming against tax the interest on money borrowed, up to the original purchase price, this does not just apply on a property-by-property basis. I aggregated the values of all properties when they had been added to the rental portfolio and all the mortgages on them. Although some that had originally been bought cheaply and later remortgaged had mortgages on them well in excess of their purchase price, when aggregated with the other properties in the portfolio whose mortgages were still well below their purchase price, the total borrowing was well under the total purchase price of the portfolio as a whole. HMRC confirmed that this was a valid way to calculate the limit of borrowing that could have its interest set off against rental income for tax purposes. I was able to use that fact to adjust a previous year's tax return and the future ones.

Before I borrow further, though, and take the total borrowing above original value, I shall have to calculate how much of the borrowing was actually used to finance further purchases, as that will affect the calculation of how much interest will be allowable, as you have pointed out.

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