Conventional Repayment Mortgage vs Buy-to-let

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    Conventional Repayment Mortgage vs Buy-to-let

    I'm fairly new to Landlording and have a couple of questions.

    I am getting married this summer and have a new build home to move into. My partner's flat (where we currently live) will continue on a repayment mortgage until the end of the fixed term and we will have tenants paying rent which will cover the mortgage repayments (after we have moved out).

    When this fixed period is over we intend to continue renting the property but not sure that we want a BTL mortgage - we want to own it then continue to have rental income as profit only when it is paid off. We'll also have the capital available for our retirement when we dispose of the property.

    Is this something that is done?

    There is the tax implications as well which I have thought about but not fully considered or calculated.
    The CGT payable on disposal would surely be the same as if it was on a BTL mortgage. The only part that is less tax efficient is the fact that I will not get tax relief on the capital repayment part. I would need to some calculations to see what tax I'd need to pay.

    I'd like to know your thoughts...

    Thanks!

    #2
    Letting a property is a change of use and reportable to the mortgage provider. Failure to do this can cause the provider to call in you mortgage and force you to sell. Some mortgage providers, even high street names will accept letting by a simple letter and in some cases it has not effected the %. Some change it to a B2L mortgage at a slightly higher %. Note the interest from a rental property can be deducted from gross rental income up to the value of the property when first let, so a re-mortgage just prior to renting would release equity of which the interest is tax deductible, extra this equity can then be used to reduce the mortgage on the new property. I would also suggest you get your self added to the deeds of the flat as you may wish to rent it out for a long time and Any 'Owner' that has actually lived there as an 'Owner' will qualify for Letting relief of up to £40,000 per Owner. Take legal advice on obtaining a share in her flat. If you just left it as is and married and moved into the new house only you then wife would qualify for PPR exemption and letting relief. Regards IR283 on the HMRC web site.

    Comment


      #3
      You only get tax relief on the interest part of your mortgage repayment. No tax relief for the capital part - which I think you are suggesting.

      Get yourself added to the deeds AFTER you are married (so partner pays no CGT on the gift to you), but BEFORE you move into the new house (so you both get the PPR relief when you come to sell).

      Pete makes a good point on mortgage interest deductions. If you bought flat for 100k with a 75k mortgage, and it's now worth 200k with a 75k mortgage, you can get tax relief for the interest on the extra 125k mortgage.

      Best of all, that 125k can be secured against your new house.
      The contents of this note are neither advice nor a definitive answer. If you plan to rely on this, you should pay somebody for proper advice.

      Comment


        #4
        Originally posted by GMcCall View Post
        we will have tenants paying rent which will cover the mortgage repayments (after we have moved out).
        While the tenants are paying rent, aim to declare the rent and mortgage interest on your annual self assessment tax return, build up a tax loss and carry this tax loss forward from year to year. I have done this and have built up a large tax loss. A tax loss is a good thing. It stops you paying tax on your rental income.

        Originally posted by GMcCall View Post
        we want to own it then continue to have rental income as profit only when (the mortgage) is paid off.
        Intuitively, we all want to do this but the risk in paying off the mortgage and then renting is that you are exposed to rental income tax. I prefer to run a small mortgage alongside a tenancy i.e. the mortgage term and the tenancies are concurrent. In this way your mortgage interest always cancels out the rental income tax due.

        Originally posted by GMcCall View Post
        I will not get tax relief on the capital repayment part.
        True so why choose a repayment mortgage? Suggest you convert this to an interest only mortgage at the first opportunity.

        Comment


          #5
          Originally posted by GMcCall View Post
          I'm fairly new to Landlording and have a couple of questions...
          When this fixed period is over we intend to continue renting the property but not sure that we want a BTL mortgage - we want to own it then continue to have rental income as profit only when it is paid off.
          Sorry to be pedantic (yes, I often am), but you DO become the owner once you purchase- even on a purchase funded by mortgage advance.

          It is a common misconception that property purchase is like HP on goods. In the latter case, ownership does not transfer to the customer until all payments have been made; property is different, and the mortgagee [=lender] holds only a registered charge protecting its loan to you by way of security.
          JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
          1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
          2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
          3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
          4. *- Contact info: click on my name (blue-highlight link).

          Comment


            #6
            Originally posted by GMcCall View Post
            I'm fairly new to Landlording and have a couple of questions.

            I am getting married this summer and have a new build home to move into. My partner's flat (where we currently live) will continue on a repayment mortgage until the end of the fixed term and we will have tenants paying rent which will cover the mortgage repayments (after we have moved out).

            When this fixed period is over we intend to continue renting the property but not sure that we want a BTL mortgage - we want to own it then continue to have rental income as profit only when it is paid off. We'll also have the capital available for our retirement when we dispose of the property.

            Is this something that is done?

            There is the tax implications as well which I have thought about but not fully considered or calculated.
            The CGT payable on disposal would surely be the same as if it was on a BTL mortgage. The only part that is less tax efficient is the fact that I will not get tax relief on the capital repayment part. I would need to some calculations to see what tax I'd need to pay.

            I'd like to know your thoughts...

            Thanks!
            I would suggest a buy-to-let mortage because of the simplicity. Even tho there is a tax cut in the CGT in the long run you'll profit more from the buy-to-let
            Last edited by Editor; 03-01-2010, 21:06 PM.
            The Buy To Let Center! =>

            Where I get all my Buy-To-Let info!

            Comment


              #7
              Hi there,

              I am in the process of gettng a mortgage through Britania, its for my primary residence but I do plan to let 2 of the bedrooms out given it has 5 bedrooms and its just me and the missus.

              Does anyone know if I have to let Britania know when I am just letting some rooms. If so are they likely to want to charge more interest?

              Also can I still get tax relief on my mortgage payemts when I am resident at the property?

              Baz

              Comment


                #8
                Are you talking about the 'Rent A Room' scheme?
                JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
                1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
                2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
                3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
                4. *- Contact info: click on my name (blue-highlight link).

                Comment


                  #9
                  I am a total noob, what is the rent a room scheme?

                  Comment


                    #10
                    Originally posted by Bazman View Post
                    I am a total noob, what is the rent a room scheme?
                    See this link: http://www.hmrc.gov.uk/individuals/t...m-scheme.shtml
                    JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
                    1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
                    2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
                    3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
                    4. *- Contact info: click on my name (blue-highlight link).

                    Comment


                      #11
                      Ah OK found it but not allowed ot pose URL's yet:.

                      To give you a fuller picture:

                      I don't currently work but I do have another flat I let out (its completely paid off).

                      However my girlfriend works and is in the top tax bracket. Her name is only on the house where we intend to let rooms out as it is a joint purchase. assuming we can let the rooms with no breaks I think we should take in circa £10,800 per annum. I realise their will be costs which will have to be deducted from this figure.

                      With this in mind and considering the tax relief we may be able to get on our incomes what would be the best scheme for us?

                      Also when it comes to the mortgage surely letting rooms does not constitute but to let? Should I expect any change in the mortgage rate we will be asked to pay? I'd be particulalrly keen to hear from anyone who has dealt with Britania specifically.

                      Comment


                        #12
                        Pying interest to avoid paying tax

                        Originally posted by MetropolitanAnthony View Post
                        While the tenants are paying rent, aim to declare the rent and mortgage interest on your annual self assessment tax return, build up a tax loss and carry this tax loss forward from year to year. I have done this and have built up a large tax loss. A tax loss is a good thing. It stops you paying tax on your rental income.

                        Intuitively, we all want to do this but the risk in paying off the mortgage and then renting is that you are exposed to rental income tax. I prefer to run a small mortgage alongside a tenancy i.e. the mortgage term and the tenancies are concurrent. In this way your mortgage interest always cancels out the rental income tax due.
                        This one always baffles me. Some people deliberately choose to pay interest to save on Tax. Can we understand one thing...
                        you pay tax on the rental income. forget the actual tax rates but say you paid 20% tax, you keep the other 80% - it goes in to your pocket. If you 'chose' to pay interest so that you wouldnt have to pay any tax, the interest would have to equate the rent you bring in.
                        So, taxman, gets 0%, bank gets 100% (in interest), you get 0%. What would you choose? I'd be happy with the 80%!

                        Comment


                          #13
                          BTL finance

                          Originally posted by oneoption View Post
                          you pay tax on the rental income. forget the actual tax rates but say you paid 20% tax, you keep the other 80% - it goes in to your pocket. If you 'chose' to pay interest so that you wouldnt have to pay any tax, the interest would have to equate the rent you bring in.
                          So, taxman, gets 0%, bank gets 100% (in interest), you get 0%. What would you choose? I'd be happy with the 80%!
                          Now that that is sorted, if you need assistance raising finance under a BTL, I can help you at a rate of 3.49% (quarterly reviews - 2.75% + 3month LIBOR every 3 months) or at 4.49% if you want to fix it for a year every year (this will be done automatically every 1st April - the rate will be 2.75% + 1yr LIBOR every 1st April).

                          Let me know if you need my help.

                          Comment


                            #14
                            Thanks for the info guys its becoming a little clearer.

                            In the situation where I only let two rooms I am right in thinking there is no need for BTL?

                            Comment

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