Pay off residential with buy to let

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    Pay off residential with buy to let

    Hello,

    First poster here looking for advice, this is our situation. We have one buy to let property mortgaged at £40000 and worth around £130000 and our home with a £65000 mortgage worth around £190000. We are looking to move house but keep both properties. Would it be wise to paid down the £65000 home by remortgaging the buy to let and putting some savings towards or change our home mortgage to another buy to let? Buy to let currently let's for £575/month and has done for 5 years.
    thanks
    2buytolet

    #2
    If the figures stack up I would always recommend paying off the residential mortgage given that there are no tax benefits to be used against the mortgage interest element of the loan; whereas there still remains a slight advantage in the tax regime for residential property investments.
    Given that you wish to retain the current prime residential as a Buy to Let remember the penal 3% SDLT Premium for buying a new home for yourselves I would suggest gearing up to a prudent level against the property to assist in the new purchase.

    Comment


      #3
      Originally posted by loanarranger View Post
      If the figures stack up I would always recommend paying off the residential mortgage given that there are no tax benefits to be used against the mortgage interest element of the loan; whereas there still remains a slight advantage in the tax regime for residential property investments.
      That is the cleanest solution but not the best financially once the new S24 tax rules are fully implemented.

      There is quite a lot to this but the crux is that residential mortgages are cheaper than BTL.

      e.g
      interest on £100,000 BTL mortgage at 2.5% - 20% tax 'relief' = £2000 pa
      interest on £100,000 residential mortgage at 1.5% = £1500 pa


      Therefore it is better financially to pay off the BTL first.

      (or have I missed something!)



      Comment


        #4
        Boletus , you make an interesting observation , however I have always taken a “ conservative” approach to such matters believing that having one’s main residence unencumbered is a safety net should financial difficulties ensue and adversely affect the financials of investment properties . Others may indeed take a diametrically opposite view and many take a more entrepreneurial attitude to borrowings, and whilst it is an extreme example I have attended too many repossessions in my career in building societies and seen the emotional ramifications attached to such instances so yes my personal option would , given the circumstances of the OP opt for having the main residence unencumbered by debt.

        Comment


          #5
          Originally posted by loanarranger View Post
          I have always taken a “ conservative” approach to such matters believing that having one’s main residence unencumbered is a safety net
          I'm sure loanarranger is well aware but just to point out to others reading, UK BTL mortgages are not non-recourse lending.
          i.e if you default on a BTL loan, it doesn't end with the lender repossessing the BTL property, they can still come after your main residence or other assets.

          Personally I'd rather use the 500 quid p.a saved in the example above to help build a safety net.

          Comment


            #6
            Hi Boletus, before I responded to your reply I thought I would seek legal opinion since your view on Non Recourse Lending was slightly at variance to my understanding and I am detailing the majority of the response, I would add that he is also a director of a Buy to Let lender.
            Given that the vast majority of BtL funding is circa 75% or below I think the possibility of there being a shortfall should possession of the BtL(s) be undertaken would be distinctly unlikely but not impossible.
            I appreciate your contribution which got my grey cells working overtime.

            ”1. The BTL would have to be in the same personal names as the main residence
            2. Tax Returns would have to show that the BTL has been treated 50/50 during ownership - the law assumes main residence is equally owned unless any document exists to vary standard positions

            So assuming the BTL is sold and the lender bears a loss then they might decide to pursue the borrower jointly but a Court would have to find against them and doesn’t automatically have a right to seek forfeiture of their house

            Your thought on the BTL being non recourse would work if the Loan had been ringfenced within a LTD Co without Directors Guarantees.

            Comment


              #7
              Appreciated, I agree with that. Points I'd make are;

              1. By the time it gets as far as repossession stage, I think there usually is a significant shortfall. I bought quite a few repossessed flats in 08/09 for less than half their previous purchase price.
              2. The ownership and shared main residence set up is a common arrangement (and tax beneficial). And obviously it only applies to couples.
              3. My understanding is that availability of BTL lending within a Ltd Co without Directors guarantees is virtually non existent (?)
              4. Forfeiture of the main residence is a lot more difficult for lenders so is a less risky safety net. I have revised my opinion more positively on that. But that doesn't mean lenders are going to write off the shortfall, they will still go for repayment plans and charging orders on the main residence.

              Comment


                #8
                Hi Boletus
                The post credit period did indeed create issues over repossessions and negative equity, subsequent to this you will recall that those lenders operating in the BTL sector were very risk averse as indeed was the Affordability assessments for residential home loans and it is only recently that some lenders in a quest for securing higher levels of business marketed funding at 80%, something I feel is inappropriate but only time will tell.
                The point you make on (3) is indeed correct , I know of no lender operating in the corporate element of BTL funding that doesn't insist on PG's indeed going one step further , such lending invariably used to require a Floating Charge across the company's assets and it is only this year has this requirement been waived.

                I agree that lenders will not write off any shortfalls on any repossession and will keep a beady eye via credit data on any signs the person might be in a position to bring closure to the matter.

                Thanks again for making constructive comments which hopefully will help the OP and others who might be in similar situations.

                Comment


                  #9
                  Oriiginal poster here. Thanks for the great advice. After careful consideration we have decided to raise capital from remortgaging the buy to let to pay our residential mortgage off. I think the safety net option is best. Gives us exit if required in the future even though it goes against my instinct and also will create maximum cashflow when we eventually move on. I can't help feeling that times have changed and maybe the markets topped out meaning cashflow will be more effective over capital appreciation. Thanks again

                  Comment


                    #10
                    On a personal level I believe you have made the right decision. Best of luck going forward.

                    Comment

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