Reply to: BTL mortgage advice please!

[Ardesco]

Your friend doesn't really understand it himself, and is paying out a lot of money on tax that he doesn't need to.

To put it simply, if you pay off the outstanding capital on your BTL you have to pay more tax.

If you use the money from the BTL to pay off the capital on the house you live in you do not pay more tax, and you are mortgage free on your main residence quicker.

Where would you rather be in 30 years, a BTL property that is mostly paid off, but you have paid a load of tax and are no nearer to paying off the mortgage on your main residence. Or mortgage free on your main residence with a BTL that will get you some cash in your pocket when you sell it.

it is very simple, PAY OFF THE MORTGAGE ON THE HOME YOU LIVE IN FIRST. If the worst should happen, which property would you rather be left with? Once the mortgage on your main residence has been paid off start paying off the capital on the BTL, but not before!!

If your freind can't see that this is the obvious thing to do I suggest he is not really cut out for the BTL market himself.

[tim123]

You are understanding wrongly.

If your 100K house sells for 200K in 5 yeras time, you will make (and be due to pay tax on) 100K of profit regardless of how much of the original 100K you have paid off.

tim

[b0redom]

Because if you pay off the capital on your BTL, you'll be deemed to be making a profit, and will start to be taxed on the income from it.

[Trev16v]

I've been in more discussions with my IFA about this lately and he's still saying to go for an interest-only BTL mortgage as you gents are mainly recommending; however, what I still need to get straight in my head is what I should be doing in the long term regarding the actual capital of the rented-out house.

Just to put some figures into the equation here, the oustanding balance on our house is approximately 100K and the house is probably worth £135Kish. If I am to pay the smallest deposit I can get away with, then I would probably pay another 10K or 20K off the balance so that I could have it on a 75 or 60% LTV BTL mortgage. The BTL mortgage would have a rate of 4.99% - that's the best rate we can find (Cheltenham and Gloucester). I am therefore looking at monthly interest-only repayments of approximately £400.

New house will be about £260Kish; our existing mortgage (0.49% above base) would be ported over to that new house. Towards this house we may provide about 100K, which would be split between an initial capital deposit and a lump to go into the offset savings account.

Okay, let's say that the rental income will be £600 per month (realistic, but worst case). Once the interest component and agency charges are taken out of that, there's not a whole lot left over really. If I wanted any profit from the rent, I would need to pay a larger deposit off the balance.

Let's say for the sake of argument that I could potentially have some money left over from the rent each month as profit.

Now a friend of mine has a BTL house and he has it on a repayment mortgage. He has insisted - lectured me, in fact - that this is the way to go; he says that surely it is pointless having a house sitting there and have all rental income go towards interest, and for the house capital to not be paid off whatsoever. It's much better having capital paid off the BTL house, too, so that when you come to sell it, you're not just going to rely on equity in the house to make you money.

But am I right in understanding that, due to the complexities of Capital Gains Tax and so forth, it is actually much better to invest the profit from the rental income anywhere but the rental property? If I get profit each month, it's better off going into the offset savings pot on our own residential house (or some other investment means), as opposed to the rental home?

My friend is telling me that I'm bonkers not repaying any of the capital from my BTL, because in, say, 30 years time when I come to sell it, I would only have the equity generated by the house (which, in 30 years time, should hopefully be a lot more than 100K).

On the other hand, if I provide a large enough deposit towards the BTL (say I pay off half of it, i.e. 50K), the monthly rent could start to pay off the capital, too. So when I come to sell in 30 years, the oustanding loan amount is a hell of a lot less than 100K and I'm better off.

But actually I'm worse off, right? Because the implications of CGT and so forth actually means that my 50K deposit, and any rental profit, would have been better off invested elsewhere (e.g. paying off our own home's capital, a good savings account, and so forth).

I'm still trying to grasp why it would be better for me to put the 100Kish balance of my BTL on a 4.99% mortgage and then use all of our money to pay off a large whack from our new house, thus reducing the amount we're borrowing at +0.49%; when my simplistic mind tells me that surely it's better to reduce the amount I have to borrow at 4.99% as much as possible.

Trev

[tim123]

2. You pay CGT when you sell the property, less taper relief.

Not any more you don't. Taper relief has gone

tim

[slackbloke]

A few issues you seem not to have considered:

1. You pay tax on the rent less costs at your highest taxable band.

2. You pay CGT when you sell the property, less taper relief. Try telling HMRC you've lived in it when you have a BTL mortgage and they'll laugh at you even more.

3. BTL mortgages are no longer flavour of the month and you'll have to prove you are whiter-than-white financially. Self employed are not in that bracket unless you have a proven track record in the BTL market.

4. Down time can be very costly if you are relying on the rent to pay the mortgage. I used to do my calculations on 75% occupancy.

5. Management fees erode your profits substantially, do it yourself if possible.

6. Insurance charges are high and mandatory with a mortgage.

7. The BBC did an article on professional 'bad tenants' only this week - they can cost you thousands at best and possibly bankrupt you at worst.

Not sure what your point 2 is about. Having a mortgage and/or what type it is is irrelevant for the purposes of CGT. If the property was your PPR at some point you get 3 years of CGT exemption when you sell it.

[A Good Man]

Everyone loves free money......

A few issues you seem not to have considered:

1. You pay tax on the rent less costs at your highest taxable band.

2. You pay CGT when you sell the property, less taper relief. Try telling HMRC you've lived in it when you have a BTL mortgage and they'll laugh at you even more.

3. BTL mortgages are no longer flavour of the month and you'll have to prove you are whiter-than-white financially. Self employed are not in that bracket unless you have a proven track record in the BTL market.

4. Down time can be very costly if you are relying on the rent to pay the mortgage. I used to do my calculations on 75% occupancy.

5. Management fees erode your profits substantially, do it yourself if possible.

6. Insurance charges are high and mandatory with a mortgage.

7. The BBC did an article on professional 'bad tenants' only this week - they can cost you thousands at best and possibly bankrupt you at worst.

[ASB]

You need to be careful here. If you port your existing mortgage to the new house you can then raise a BTL mortgage on the old house and you can raise a large enough mortgage as the rent permits. However, when it comes to claiming tax relief on the rent, the relief is limited to the cost of the original purchase mortgage. In other words, say the house is now worth £200k and the rent allowed a BTL mortgage of £150k to be put in place. If the house was originally purchased for £100k then it's relief on £100k that you can claim, not the £150k mortgage that is now in place. There are a number of CGT releifs concerning Principal Place of Residence that should be of benefit to you when you finally come to sell.

In terms of the example you gave interest on a mortgage of 200k is claimable. A viable strategy can be to obtain a second mortgage on an interest only basis on a seperate house for 200k. Relief on the interest is then claimable. Any excess income is better used to service any other debt and keep the 200k outstanding until such point as all other debt if paid off. [depending on effective rates charged based on individual tax position of course]

You **can** claim relief to the value of the property at the point the rental business **starts**. Though I accept it can be difficult if the mortgage is not secured on the actual property being let. It is "simply" necessary to convince HMIT that the money raised is being used to finance the property being let. The point is that the taxman cannot tell how you will use your free capital or how you will finance your business assets - but it can lead to some long chats with him

[Trev16v]

Can anyone suggest a company that would offer a better BTL interest rate than C&G currently do? Any little, non-high street names I should try?

[Trev16v]

Many thanks for the responses I've had here. I'm very grateful, and I appreciate the time that you gents have taken to provide detailed information and example figures.

Be assured that we won't be rushing into buying new property until we really feel it's the right time. Over here in Oxfordshire, property prices have obviously seen some reduction, yet they remain stubbornly high compared with prices in neighbouring counties. I do hope that prices continue to slide a bit more so we can afford to buy what we really want here, as otherwise I see us up-rooting and going to Wiltshire or Gloucestershire, where you seem to get double the house for your money compared with here.

Trev

[tim123]

Hi all,

The wife and I have had our first house for about five years. It is on an Abbey life tracker mortgage at a very good rate (+0.49), which has an offset savings account.

We wish to buy another house soon, preferably this year.

If you want to take 100K and throw it away, please give it to me instead

tim

[Ardesco]

I would suggest the following:

Use the money to buy your new house and remove as much mortgage as possible. Switch the old house to an interest only mortgage and don't pay off the capital on it.

Then when you get rental the interest component of your mortgage on the rental property (i.e. all of it) can be taken off your rental income when it comes to working out tax. If you furnish the house you can also claim 10% (I think it was 10% anyway best to check) of your rental income as upkeep. To furnish you have to supply at a bare minimum a bed, wardrobe, sofa and white goods in the kitchen. Supply minimal furnishings to be able to claim the upkeep allowance.

So using some ball park figures:

Rental income: £700/month

Mortgage cost: £500/month
10% used for upkeep £70
12% agents fees £84
building/contents insurance £25/month (pure guess depends on what you insure and where)
Total outgoing: £679/month

So total yearly income that you have to pay tax on: £252

Do not put a repayment mortgage on your BTL, just use the excess money to pay off your mortgage on your main home or invest it somewhere. If you have a repayment mortgage on your BTL you can only claim back the interest portion of the mortgage and you have to pay tax on capital gains made by increasing your ownership on the rental property. Lots of complicated and pain in the arse figures, interest only keeps it simple.

Also worth looking at getting yourself registered to hold the tenants deposit, if you don't you will have to let some accredited company do it for you. They will charge you a fee and then make interest off the money while they hold it (what a business plan hey....), far better to hold the deposit yourself and make interest off it.

Finally don't lower the rental rate for the sake of saving a couple of quid in tax, it's not worth it.

[glashIFA@Paramount]

Hi all,

The wife and I have had our first house for about five years. It is on an Abbey life tracker mortgage at a very good rate (+0.49), which has an offset savings account.

We wish to buy another house soon, preferably this year.

My wife became ill last summer, and because of this we had a claim admitted from our critical illness insurance. This money is sufficient to completely cover both the oustanding balance of our house, and provide a reasonable desposit for a new house, too.

We have always wanted to be able to keep our first house and let it out once we bought our new house. Before the insurance payout, clearly we would have had to have used a BTL mortgage. The intention would be to port our existing mortgage over to the new house due to the good rate (which I know we would never get again). But with our circumstances having changed, I now see a range of options:

1- Pay off the balance of our present house completely. When we move house and let our first house to someone, all rental income will be 'profit' and subject to tax. We only ever have one mortgage, i.e. our residential Abbey one, which would be ported to the new home.

2- Don't pay off the balance completely. Instead, get a BTL mortgage with something like a 60% LTV in order to achieve the best rate possible. (I need to check the C&G website again, but off the top of my head I think their BTL mortgages are probably going to be 4 or 5ish % at the very best). Arrange the mortgage so that the rental income only just covers it (or just falls short of it) so that there's technically no profit from the house. This would be a repayment mortgage. The money that we have kept by not paying off the balance would instead all be shoved into the offset savings account with the residential Abbey mortgage (which would have been ported to the new house).

Our financial advisor suggested option 2 because apparently it may be more tax efficient. I am a contractor and I am already going to hit the 40% bracket if I take out all the dividends I'm entitled to this year. So presumably I will be hit very hard if I start having additional income from a BTL, too.

How about if the house balance was paid off and there's no BTL mortgage, and the rental income goes into my wife's name? Fortunately she is recovering well and is still working. She's not earning much (less than £20K). So, could it be most 'efficient' to have the house balance completely paid off, and all income going to her, with her hopefully / probably keeping within the lower tax bracket?

She is not currently a second shareholder of my Limited Co., but it's something I've discussed arranging with Brookson.

If and when we come to sell the 'BTL' house in the distant future, would it always be subjected to capital gains tax? Is the capital gains tax affected by how the house is paid for, i.e. whether we pay for it outright using our money, or paid off from rental income?

I shall be seeking further advice from the IFA but I'd just be interested to have opinions from on here too, as I know a few of you have BTL properties and are far, far more switched on than I am when it comes to tax issues!

Thank you

You need to be careful here. If you port your existing mortgage to the new house you can then raise a BTL mortgage on the old house and you can raise a large enough mortgage as the rent permits. However, when it comes to claiming tax relief on the rent, the relief is limited to the cost of the original purchase mortgage. In other words, say the house is now worth £200k and the rent allowed a BTL mortgage of £150k to be put in place. If the house was originally purchased for £100k then it's relief on £100k that you can claim, not the £150k mortgage that is now in place. There are a number of CGT releifs concerning Principal Place of Residence that should be of benefit to you when you finally come to sell.

[slackbloke]

Thanks for the points raised.



Be assured I certainly been keeping up to date with what house prices have been doing, and read countless predictions on what it's proposed to do over the next so many years. Some seem to say we'll be at the bottom towards the end of this year; some say we have many years to go yet. This is a whole separate debate really and I've read a number of threads about the housing market on here. I do totally take on board your comment. We won't rush into anything, and we'll not buy until we feel it really is the right time. However, I just want to be prepared for what we're going to do, and I'd like to work out well in advance what to do with the current house that we're going to let out.



Responding to slackbloke's comments:



Understood. Thank you.

I agree that I already should be income shifting. It is something that I am in the process of arranging through Brookson. Haven't been contracting for all that long but that's no excuse - I should have got my finger out of my hole and arranged it a year ago. Fortunately, a lot of 'my' money remains in the business account which I continue to roll over and hence I've not been stung on higher rate tax yet.



Okay, so I understand you're advising is that I do NOT have income from the let house going into the wife's name, but rather it should all come into my existing Ltd. company, and I use income shifting to avoid the higher rate tax. Doing it this way, as opposed to the wife having it as a separate business income for her, would avoid her having to start doing SA Tax Returns.

The point I would like to clarify a little more is your suggestion of having the let house on an interest-only mortgage. Or, indeed, why have it on a mortgage at all, when it's possible for us to pay off the house outright. I think that 's2budd' is pondering this, too.

The options seem to be:

- Pay off house outright. All income (say, 500 or 600 rent a month) is profit. I could use income shifting to rake this extra cash in per month and yet still avoid being hit heavy on tax.

- Use an interest only mortgage on the house. At current rates, on interest only, the mortgage would be a bag of peanuts per month (but I certainly acknowledge it could shoot right up again in the future). So, there would still be profit each month. I reckon the profit would probably be something like 300+ per month after interest only mortgage payments. The advantage of this that I can see is that we don't sink a huge amount of the money we have into the house; instead, that money remains in our residential mortgage offset account, and it's money for us to use to improve our new house and so on. Disadvantage? We have the mess of having a BTL mortgage as well as our current Abbey mortgage. And our rental income is going towards mortgage interest, which *could* one day shoot up again.


I suppose the question I'm trying to ask here is this - if I stick the house on a BTL mortgage as opposed to just paying it off outright, then in the long run, would I be much worse off having had to use much of the rental income to pay the mortgage interest? Or, if the house is paid off outright, can I actually find myself even worse off because of 100% of the rental income being profit?

Not sure what you mean about putting it through your Limited company. If the house/mortgage is in your or your wife's name is it personal income.
The situation depends really on how much debt you have. If you will still require a mortage of some sort for your new property, you are better off getting an interest only BTL on the old property for an amount that gives a mortgage cost similar to the rental income and then you have no tax to pay.
Any money from the mortgage not needed for the property can be used to offset your new home. So potentially you can end up paying no tax and no effective interest. There is little point buying the let property outright as no matter what you do you will pay tax on the income.
The point is, you have to pay tax on income from a secondary property and you only get tax relief on a secondary property with costs. So the optimal way to do it is with a interest only mortgage.

[Lewis]

Hi all,

The wife and I have had our first house for about five years. It is on an Abbey life tracker mortgage at a very good rate (+0.49), which has an offset savings account.

We wish to buy another house soon, preferably this year.

My wife became ill last summer, and because of this we had a claim admitted from our critical illness insurance. This money is sufficient to completely cover both the oustanding balance of our house, and provide a reasonable desposit for a new house, too.

We have always wanted to be able to keep our first house and let it out once we bought our new house. Before the insurance payout, clearly we would have had to have used a BTL mortgage. The intention would be to port our existing mortgage over to the new house due to the good rate (which I know we would never get again). But with our circumstances having changed, I now see a range of options:

1- Pay off the balance of our present house completely. When we move house and let our first house to someone, all rental income will be 'profit' and subject to tax. We only ever have one mortgage, i.e. our residential Abbey one, which would be ported to the new home.

2- Don't pay off the balance completely. Instead, get a BTL mortgage with something like a 60% LTV in order to achieve the best rate possible. (I need to check the C&G website again, but off the top of my head I think their BTL mortgages are probably going to be 4 or 5ish % at the very best). Arrange the mortgage so that the rental income only just covers it (or just falls short of it) so that there's technically no profit from the house. This would be a repayment mortgage. The money that we have kept by not paying off the balance would instead all be shoved into the offset savings account with the residential Abbey mortgage (which would have been ported to the new house).


Our financial advisor suggested option 2 because apparently it may be more tax efficient. I am a contractor and I am already going to hit the 40% bracket if I take out all the dividends I'm entitled to this year. So presumably I will be hit very hard if I start having additional income from a BTL, too.

How about if the house balance was paid off and there's no BTL mortgage, and the rental income goes into my wife's name? Fortunately she is recovering well and is still working. She's not earning much (less than £20K). So, could it be most 'efficient' to have the house balance completely paid off, and all income going to her, with her hopefully / probably keeping within the lower tax bracket?

She is not currently a second shareholder of my Limited Co., but it's something I've discussed arranging with Brookson.

If and when we come to sell the 'BTL' house in the distant future, would it always be subjected to capital gains tax? Is the capital gains tax affected by how the house is paid for, i.e. whether we pay for it outright using our money, or paid off from rental income?

I shall be seeking further advice from the IFA but I'd just be interested to have opinions from on here too, as I know a few of you have BTL properties and are far, far more switched on than I am when it comes to tax issues!

Thank you

Firstly as others have said make sure you get a good discount if buying now (but I assume you know what you are doing on that one).

Definitely make your wife a shareholder of your company. That will allow you to to use the spare amount in her lower tax band. As she already earns £20K maybe consider something like a 60%/40% split alowing you to both max out your lower rates but without pushing you into the 40% bracket. I am sure Brookson can advise on the best split.

With regards to the BTL, remember you can only offset the interest portion of the mortgage against rental profit and not any capital repayment. Whether 1 or 2 is the best option depend upon the exact interest rates and amounts involved.

To demostrate how the rates and amounts matter, say for example the first property is worth £150K and has a rental income of £500 p/m. Your interest on a BTL is going to be approximately £600 per month which means after offsetting the interest and other expenses you will have no tax to pay. However if you instead didn't have the mortgage on this property and the £150K was offset against the second home you would have half the interest to pay but you would have to pay tax on the £500 p/m rental income. Assuming 40% tax you would actually be better off not having a BTL (i.e. £300 interest + £200 tax is less than the £600 interest of the BTL). However, if the house was worth £100K with the same rental income the BTL interest would be about £420. Then you would be better off with the BTL as £420 interest is less than £300 interest + £200 tax.

When you come to sell the first house you have a grace period before capital gains tax kicks in (about 5 years fromt he date you move out I think). And then you only pay tax on a proportion of the profit based on how long you lived in the house and how long it was rented out. For example if you lived there for 10 years and rented for 10 years you would pay tax on 5/20th of the profit over the whole period (assuming 5 years is the correct figure). So at 40% you are still only paying 10% of the gain in value as tax (5/20*0.4).

Basically the answers are in the figures, there is no hard and fast rule.
Best of luck.