Buying / Selling / Mortgage / Renting Advice please...(9 Posts)
World's biggest first world problem coming up.
My partner and I own our flat in London outright. Never had a mortgage - we're incredibly lucky, saved super hard and had help. We have one DS (2) and want to try for another. We've outgrown our really lovely home and have found a house we want to buy. We're both self employed and though our earnings can fluctuate a little, we earn enough to take on the smallish mortgage to fill the gap.
However, the mortgage broker, the estate agent and my accountant have all advised us to rent our place out, take on a bigger mortgage (without selling our place we could only afford to put up 10% as profit) and use the rent to pay the new house off. Our flat is valued at 650K, rental value of around £2000 a month. New house is 900K.
We're super risk averse. Having never had a mortgage, this feels like a huge thing to take on. And I thought we'd probably be subject to paying quite a lot of tax on whatever we make from renting. But everyone seems to be advising us to do this.
OR - to mortgage current flat up to hilt, rent it out, buy new place with smaller mortgage - but then that seems confusing?!
Does anyone have any advice? WWYD? TIA.
What about voids? You still have to pay the massive new mortgage if it is empty. You must have a healthy income if advisers are suggesting that option as BTL mortgages are subject to more stringent tests than they were at the end of 2016. Also you will have higher stamp duty costs in your purchase as an existing home owner. My calculations make it £27k extra stamp duty on a 900k property which is more than a year's rent on the flat and before any expenses. We invested in property a long time before the latest changes and anti-landlord sentiment from the Governemt, but only did so with a good deposit so the mortgage is do-able even with an unexpected void. Saying that we had one tenant who didn't pay for months, the process of them leaving took another couple of months and all the time we still had to pay the bills and mortgage and it was a huge strain. Also if you have other healthy incomes the sums that used to make BTL work may no longer apply. It can still work but often only if you have a healthy LTV as all the deductions and what you can offset have changed including mortgage interest relief only at the lower level. Take a look at Property Tribes for more background. Bear in mind the advisors may benefit from this scenario too. Personally I wouldn't be investing in property now without a large deposit and the ability to pay the expenses / mortgage for six months in the event of a tenant default.
Thanks so so much Petts - this is enormously helpful.
Particularly to be reminded that the people advising us all benefit somehow if we go down that route.
I earn over 150K a year, closer to 300 on a good year. My partner significantly less though. And being self employed means there are far more risks (no sick pay etc - though I keep plenty by for worst case scenarios) so if a tenant defaulted at the same time I was unwell or something, it might be more difficult than I have been thinking about.
You've been super helpful. Not having had a mortgage means that we're being a bit green about all this. Thanks.
The sums don't add up to me- are they suggesting you do this in a tax efficient way as part of your business or something? Would you really be approved for an 800k mortgage? Could you afford the 2-4k mortgage repayments every month depending on if you get your rent paid? Is this their idea??
Think so heffalump ... So - if we don't sell ours, we have enough in savings to safely put down a 10% deposit, but not much more without really eating into in case of illness funds etc.
Unlikely to be approved for such a gigantic mortgage I think. Yes, though, I could afford those repayments.
I guess the other - more sensible thing - to do is to mortgage current flat as much as possible (possibly about 550K), use that to pay deposit on new home, rent old flat out and therefore the rental wouldn't be treated as income but could be used to pay off the mortgage alongside my earnings?!
Or am I on glue and I've got absolutely no idea what I'm talking about??
Simplest thing seems to be to buy and sell and get the small mortgage. Right???
Do you want to be a landlord?
If not, sell the flat and buy the house.
If you do - go into this with your eyes wide open and do some serious research. Landlordzone is a good resource.
You will need to do some sums to look at yield, but personally I would be surprised if it works out as well as it used to, given the additional stamp duty and not getting relief at 40%.
therefore the rental wouldn't be treated as income but could be used to pay off the mortgage alongside my earnings
Do some reading.
If you remortgaged the flat all of your rental income would go on that mortgage and it would still be counted as income and would be taxable. Plus you'd have to get a bigger mortgage to buy your current house. Not sure as self employed you'd be approved for both?? Still not making financial sense to me sorry! Have you asked your accountant to explain the benefits? I'd be interested to know too (genuinely)
Hm, I think you know the answer to this question toast. Think about this. You’ll go from one mortgage to two: (1) one of those will be buy to let, a higher interest rate and you will have to pay tax on the rental earnings and (2) another will be a heavy load as you’ll have a small deposit (depending on how you work it). If you are ready to be a landlord and take on the burden two mortgages by all means go for it.
We were in the same predicament. We were moving and considered renting out our house which is not mortgage free, then buying with a 10% deposit. We sat down and did the figures. In the end we were just going to break even with the rental income after paying taxes and the monthly buffer for issues with the property (which should always be considered). We were also not really keen on being landlords. We both have busy full time jobs and three small children. We can just about keep on top of one property! We are absolutely risk adverse, hate having debt of any kind and are keen to be mortgage free in the coming years. So we have decided to sell and potentially be mortgage free in our new location - it's all in train, fingers crossed.
Don’t go against your financial comfort zone, I think your instinct should give you a steer.
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