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Crazy to remortgage our house to buy our next home?(24 Posts)
Just a brief précis of the Capital Gains Tax position on eventual sale for a house which has (at any time) been your principal private residence (your home).
1. The period in which you have lived in the house is exempt from CGT (PPR exemption)
2. If you are entitled to PPR exemption, then the last 36 months (3 years) of ownership are also exempt from CGT regardless of whether you live there in that period or not. So moving back in for a few months before you sell has no benefit.
3. If you are entitled to PPR exemption, then an amount of the gain (so the pro-rata'd gain for the period for which the house was let, excluding the last 3 years) will be eligible for Lettings Relief, upto a maximum of £40,000 (per person, so a house in joint ownership gives you upto £80,000). There are calculations on this I won't go into, but it is a valuable relief.
4. If you have no other gains in the tax year you also have your annual exemption (again per person if a couple) of approx £10,000 (currently).
You will probably need a bit of advice on this, and if the value of your home has increased significantly between your initial purchase to the point at which you rent it, then renting it out starts to expose you to CGT even if there is no subsequent increase in value after it is rented out (because the total gain is pro-rata'd over the entire period of ownership between PPR and no-PPR, regardless of when the gain actually occurs)
Quick (basic) example:
Jan 2000: Buy house £100,000
Jan 2007: Rent house
Jan 2015: Sell house £250,000
1. Total length of ownership: 15 years
2. PPR: 7 years (while living there) + 3 years (last 36 months) = 10 years
Gain: £250k = £100k = £150,000
Less; PPR Relief: 10/15 x £150,000 = (£100,000)
Remaining gain £50,000
You then get Lettings Relief & Annual Exemption. I'd have to look up the figures but I doubt any tax would be payable on that remaining £50,000.
of course it isn't crazy - but it depends on the figures.
You need to sit down and consider potential rental income, factor in a proportion for void periods, total rental costs - insurance, repairs & redecoration, agency fees (and lots more - do some googling).
You need to think about the tax implications - interest element of mortgage payment will be offset against the rental income, but CGT will apply on eventual sale of property (although various reliefs for houses which have been your principle private residence will reduce this, perhaps to nil depending on the timescale and actual capital growth).
- It might be that your home is a lovely home, but not the best rental property (in terms of return). Get some local advice - get a couple of estate agents in to give you a rental valuation.
- Your mortgage rate may (probably will) be higher if you rent the property.
- Some tenants can be awful and you could end up with a nightmare, but most aren't.
- You need to be able to cover the mortgage payment for empty periods if they happen, just in case.
- House prices can go up and down, you may get some significant capital growth
over the years, or we may have another 10 years of stagnation, who knows!
Basically, get some local advice, do some more research and see how the figures stack up.
We had a sitting tenant from a short let rental company . We were not covered as it turned out they had no responsibility !!! We couldnt move in so had an hour and a half each way for daughter doing 11 plus . We then ended up renting somewhere . It cost us £18,000 and they left on the eve after lawyers had gone through the long process .
When we used an agency, they managed the let, for a fee. £113 per month plus vat, it was a percentage of the rental income.
I honestly think that letting the agency manage the property is more for the benefit of the tenant than the landlord. Every call out was charged at £44 plus vat, and plus parts, and additional fees if the repair person spent more than an hour, or deemed an electrician or plumber was necessary. Than one of those would be called out, at another fee. The agency took commission on all call outs, so they were making a killing and our rental profit went down.
When we took stock after three years, we had not made any profit at all.
Fair enough if you want to put yourself through it to let the property be lived in and you see it as a pension that you can sell in the future. But then there will be capital gains tax on it, if you have not lived in it for a few years. To avoid that, you will need to move back in and live in it for 6-12 months and prove that it is your primary residence.
It can potentially become a bigger headache than it is worth.
Holiday homes, now, that is a lot more profitable!
We have a complete managed service for our buy to let now, the agency are SO careful about the tenants because they know they'll have to deal with any issues. Our most recent tenants have been lovely.
Just to balance things up a bit from my horror stories, we have been holiday letting for six years and very rarely had any damage.
yes that's the kind of thing that worries me! If you get a management company do they pick up the pieces if anything goes wrong, tenants they've vetted go crazy... presumably for a good slice of the rental income?
Here's some Landlord highlights, one tenant painted a Country & Western mural in the living room, in oils, then did a flit. Another put the living room curtains up the chimney (WTF?!) and another was just absolute filth, borrowed the neighbours Dyson to clean up before moving out & stole it I replaced it obviously.
We use a management company now, much less stressful.
I can only imagine... must be a bit of a minefield depending on the tenant you get in!
Being a landlord can be a pain in the ass though
I don't think it's crazy, we've done versions of this a few times. We currently have three properties, one buy to let mortgage, one holiday let mortgage and one residential.
You can move equity around according to your circumstances, find a decent IFA to advise you. Arranging new mortgages has generally taken 6-8 weeks each time for us.
Crazy then Quints?! Good to get a reality check..!
The process of turning a home into a rental investment, get a new mortgage agreed, and find tenants, is not really very quick and easy! It is also quite costly!
Sell your house, it is mortgage free, so the value of the house can be counted as your deposit.
thanks for all the replies - I knew there would be loads of things we hadn't considered! We're not really risk takers, it's just that the area we'd like to move to is quite small and houses don't come up so often so at first we were thinking of a creative way to get the house we've seen without selling ours quick and cheap.
Quintessence "I would rather use the equity in the house as a "deposit" for a new house, and use your salaries to bridge the price gap."
How does that work (sorry ) do you mean secure the new mortgage against our existing home (which we then rent out) or sell our house and do a conventional move?
Being a landlord is a lot of responsibility, and not fun. There will be a lot of maintenance costs and ongoing costs.
I would rather use the equity in the house as a "deposit" for a new house, and use your salaries to bridge the price gap.
Message withdrawn at poster's request.
If you take out a new mortgage on the new house, you should be able to use rental income as part of the equation, not just your salaries.
Would it not be simpler to get the mortgage on your new purchase? If you have savings which cover the difference in price (or more) then you should get a decent rate.
Yes, it's crazy - you want to own the rental property outright, and live in the mortgaged home or they'll make you convert to buy-to-let which will cost you more in interest.
I think you'll probably find it easier to just take out a standard mortgage on the new home and then rent your existing home out without a mortgage. I doubt you'd get consent to let so soon after taking out a mortgage, so you might get forced onto a higher rate buy to let mortgage.
You need a mortgage adviser to talk about the finer points, but we did this.
We remortgaged our house on a buy to let interest only mortgage and used the equity released to do a self build.
We first got an estate agent out to advise on the sales value and the rental value of the house.
We were with the Woolwitch so continued to use them, the adviser came out, and gave us a proposal based on rental market, as the rent needed to cover 120% of the mortgage monthly repayment.
When you buy your next home you will have to let the bank know your current one is not your main property. It's normally written in a contract. Buy-to-let mortgages have different criteria and you need to be aware of them before you remortgage the house. I would go through a broker if I were you for both houses.
It sounds like a perfect plan to me, although I am not an expert.
If you are going to use the rental income to pay for the mortgage repayments, make sure you factor in periods of non-rental, and also put something aside to keep the rented house in good shape.
I THINK (not an expert at all) that if you sell the rented house after 3 years, you will have to pay capital gains tax on it as it is not your family home.
Is this a done thing?
We are lucky enough to have no mortgage on our home (worth maybe £220K). We'd like to move and buy a house we've seen for 250K. Is it a crazy idea to remortgage our existing home and use savings to make up the shortfall to buy the second home. And then rent the original house out (imagine about 800 pcm).
I'm sure there are lots of things I haven't considered.... anyone done something like this?
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