Buy To Let Mortgage Advice - Getting Myself Sorted Out

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    Buy To Let Mortgage Advice - Getting Myself Sorted Out

    Hello Friends,

    I have a house, value around 90K. (Original Purchase 106k)

    I moved to Australia and rented my house out to a friend and now im back in the UK and do not want to live there again. This means I need to get a proper buy to let mortgage and get myself sorted financially.

    My mortgage value is now: 70K
    I have 20K in savings (Returned Pension from Australia)

    I'm struggling on what type of buy to let mortgage to get...

    Using the rule that rent should be 125% of repayments i have come up with these options based on my rental income being 450 per month.

    1. Buy to Let on 70K (Over 25 Years) (368 Initial Repayment)
    2. Buy to Let on 50K (Over 13 Years) (367 Initial Repayment)

    I am waiting for the housing market to get better so i can sell my house when the value is back up too the original 105K but obviously i cant say how long this will take.

    I'm wondering whether its better to tie up my 20K of savings into my house, or whether to put it into an ISA for a few years while im waiting for property prices to increase. At least then ill have the option to take the money and use it for something else i.e. if i decide to leave england again before selling the house, ill have some money for a deposit on a house in Australia.

    I have also been reading up on buy to let, offset mortgages. Could this be worth it in this case?
    Any ideas / options / explanations?

    Any help will be greatly appreciated!
    Thanks!
    Fae

    #2
    The first thing to calculate is 125% at a minimum of 5% stress calculation , there are a few which are higher but this is a broad average.

    Given that property is cyclical and with the probability that interest rates will increase , I would suggest effecting a 5 year fixed rate at around 4.99% to provide stability for the initial period , keeping options open I would take out either a 20 or 25 year Interest Only loan , if you do not need the rental profit to augment your normal income/expenditure then place the residual into an ISA and build up a reserve fund from which you can at some point in the future make a capital payment from the mortgage debt.

    Being very business like , you mention that the property is let to a friend , is the rental a market rate or a personal rate because it is your friend , the latter then negotiate an increase to reflect market rates , there is no room for sentimality in residential property investment.

    Comment


      #3
      Thanks for your response.
      This has given me another angle to think about in my situation.

      I do charge rent at market rate yes.
      I dont make enough profits from renting to warrent a tax payment on it though.

      If i then switched to an interest only mortgage, this would give me profits that i would then pay tax (40%) on. This tax would then amount to more than any interest I can achieve from an ISA wouldnt it?

      Another thing I have just realised is I am only on a 12 month employment contract (extendable at my option). Im sure this will cause some problems when coming to remortgage!

      Comment


        #4
        You do make enough income from renting to warrant a tax return, though.
        Income tax is called that for a reason, it's not a profit tax.

        You receive some allowances on rental income, that you can use to reduce your tax liability.
        For mortgages it is only the interest element - so even if your repayment mortgage is equal to your rental income,
        you still have a tax liability, as the element of the mortgage that is the capital repayment is still taxable.

        If you were living in Australia, you should have been receiving rent less standard rate income tax and submitting a tax return each year to sort out any adjustments.
        When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
        Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

        Comment


          #5
          Really? Im sure i read on the tax website that if i earn under 2500 in profit from rentals i do not need to fill in a tax return. My current mortgage was originally over 35 years originally so i presumed a very high percentage the repayments would have been interest.
          I then spent my earnings from Australia chipping away to get my balance down so i could remortgage once back in the UK.

          Wow - i really need to get myself sorted.

          Thank you very much for your advice.
          I will explore options for an interest only loan.

          Comment


            #6
            If you earn less than £2500 per annum, you don't have to complete a tax return as a UK resident.
            You still have to notify HMRC of your earnings and allowances being claimed against them.

            It's best not to think of it as "profit" - it's income with some allowable offsets.

            Start here: http://www.hmrc.gov.uk/international/nr-landlords.htm
            When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
            Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

            Comment


              #7
              Contract Workers are no longer the pariahs of the mortgage eligibility class , if the contract has been renewed at least once , and you have your Contract Notes ,Tax docs to prove income , you should be able to secure a normal BtL mortgage without too much hassle: its all about provability which I am sure you can provide.

              Re-reading your orognal posting , do I take it that your lender granted permission to let given that you were going abroad? and was the condition that you advise them when you returned , if you haven't done so you might need to speak with them and importantly does your insurance company know that you have let your property on a commercial basis , they normally would have wanted to make changes and notify the lender of the terms under which the property is to be insured.

              Comment


                #8
                Originally posted by faer123 View Post
                Really? Im sure i read on the tax website that if i earn under 2500 in profit from rentals i do not need to fill in a tax return.
                This is correct... HMRC can, instead, elect to handle this additional income via PAYE.

                This may suit some people. It did me when I had a single property and I worked out the rent income and the - expected - allowances I would claim. I told HMRC about it (the rental income and my expected expenses / allowances) and they said "oh, we can handle all that via a change in your tax code and it'll be taken via PAYE".

                I kinda wished I'd gone for self-assessment anyway as my allowable expenses side of the equation had rocketed (new boiler at £1,500) so I reckon that will make the PAYE side of things null and void and there'll need to be some re-balancing. I'm not yet sure how all that works as I'm still quite "young" in this game myself, but I will have the joy of finding out.

                Comment


                  #9
                  Originally posted by Hippogriff View Post
                  I'm not yet sure how all that works as I'm still quite "young" in this game myself, but I will have the joy of finding out.
                  Marsy pays his rental tax through PAYE. In October, after his self assesment, he got a nice cheque for a tax refund.

                  But in January, after a review, he got a tax demand to be paid in 2 weeks. But luckily, the tax demand was for half the value of the tax refund.

                  Comment


                    #10
                    Originally posted by faer123 View Post
                    Really? Im sure i read on the tax website that if i earn under 2500 in profit from rentals i do not need to fill in a tax return. My current mortgage was originally over 35 years originally so i presumed a very high percentage the repayments would have been interest.
                    I then spent my earnings from Australia chipping away to get my balance down so i could remortgage once back in the UK.

                    Wow - i really need to get myself sorted.
                    You're making a number of strange (and incorrect) assumptions, quite apart from your informal approach to renting out your mortgaged property (which would normally preclude such a use).

                    If your rental income is £450 pcm, that's an annual income of £5,400.
                    If your mortgage was about £90k originally (at about 4%) you'd be paying about £4.8k per annum in mortgage.
                    As you've been making capital repayments, that's possibly overstated.

                    The repayment schedule for repayment mortgages is front loaded with interest, so the actual amount of interest in the mortgage would be fairly high (depending on how long ago all this started).
                    I've never tried to complete a tax return against a repayment mortgage, so I don't actually have any experience of how that would work.

                    However, in order to be able to get any allowances, you have to agree them with HMRC and then pay the tax on the relevant income (£2,500 is a normal threshold for completing a tax return for a UK resident tax payer, not the point at which tax becomes applicable).
                    As you're not a UK resident tax payer, that's academic anyway; as a non-resident landlord you have to complete a return if HMRC ask you to (and they would have done).

                    Unless HMRC have formally agreed, you should have been receiving your rent less basic rate tax (if not, your tenant - assuming there was no agent - who is actually liable to deduct and declare that tax, has probably committed an offence as well as you).
                    That deduction would have been about £1k per annum - and you would probably have wanted to complete a tax return to obtain any rebate that might be due.

                    As it is, from the sound of it, your tenant hasn't been paying the correct tax or completing the required quarterly and annual returns (and is probably going to be in trouble with HMRC if/when someone finds out).
                    You haven't registered as a non-resident landlord (problem 1) and haven't been declaring or paying tax on your rental income (problem 2).

                    I'd find an accountant and start to get this sorted.
                    Or not mention any of this to anyone ever and hope no one finds out.
                    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                    Comment

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