AIBU to sell my rental property to reduce our mortgage?

[YellowDaffodil25]

If you had a £800k mortgage on your residential property, and a debt free rental property valued at £350k, would you sell the rental property and use the proceeds to pay off part of your residential mortgage? Coming to the end of a 5 year fix on the residential property so will see a big jump in the interest, and therefore monthly mortgage repayments. The rental property is currently empty and would need maybe £40k investment before it can go back on the market, but would probably achieve a 6-7% yield pre tax. Have always seen rental property as an additional income stream/pension income for the future but with interest rates where they are, and the headache that now comes with being a landlord, AIBU unreasonable to cash up the rental and pay off part of the residential mortgage?

Whose name is the rental property in? Is it jointly owned? We were in a slightly similar situation (were renting out our previous family home, and had massive mortgages on both the previous family home (then rented out) and on the property we had bought afterwards to live in). So had about £800k of mortgage split between both properties.

I realised that as the rental property was jointly owned and dh is higher rate tax payer, then the changes to mortgage interest relief would mean that it was financially not viable - so we decided to sell, and pay off our residential mortgage with the equity released, and we have not regretted it.

We sold in early 2022 (before interest rates went mad), and I am so glad we did as I think we would have ended up bankrupt - the high mortgage level would have left us very vulnerable, in financial terms.

I'd sell the house, clear the mortgage and move into the rental.

This thread is fairly risk adverse
I’m not sure I would take advice from here

Sell.

We cant advise without the full financial picture, but surely you're not going to be able to remortgage your 800k loan on the open market and will have to stick with your current lender... and whatever rate they offer? It sounds to me like youve absolutely no choice but to sell either property. And if you're likely to be on 130k for the foreseeable I don't think you can afford to 800k property at all and would need to move into the smaller one?
Unless there's a lot of info missing from your OP.

The rental property (once you get it on the market) is free money

Are you serious? If you invested the value in S&S pension over the last few years you will have had a much better ROI and tax position.

The concept of rentals as "free" money is outdated due to the costs associated with rental. The Op has said her return is likely to be 1 or 2 % which if she spends 40k on it makes any profit disappear. Add in tax and you are not making money at all.

The is some value in appreciating capital but only invest if there was excess money, after first maxing out pensions, S&S ISA first.

Depends on where you live, if you could sell the 800K and move into a property that is financially more your current household income and keep the rental. Because once the rental mortgage is paid off it is decent income and you have that asset to sell if, say your children need a house deposit.

You need a pension fund of what £250,000 to get an income of about £12K and that depends on when you retire and how long you live.

I would keep the rental doing what it's doing and sort out your actual residence to work with your income.

Ouch 800k mortgage - will you even be able to remortgage on one salary of 130?

what are your monthly repayments?

Sell the big house, live in the rental. Luxuriate in your spare money and reduced worries.

For all saying to move into then rental, it’s the opposite end of London (2 hours drive away) and doesn’t make sense as the kids schools are near the residential. The LTV on the residential property is less than 50%.

Will be able to remortgage on the new salary if we stay with the existing provider - but at whatever rate the offer at the time, which isn’t necessarily going to be the best rate on the market. Monthly payments will likely increase to around £4k at current rates

It’s in the name of the person bringing in the salary, so any income is taxed at the higher rate

The earner’s pension pot is already at £750k…

If you want to keep it, you need to transfer it to the lesser paid person. We did this for tax reasons.
That income counts towards the mortgage assessment for our residental property

However selling it is probably the best, unless you think it will increase in value

What would you do out of interest?

That's fair but I would be looking closely at repayments and considering downsizing. You are sailing pretty close to the wind imo.

Speak to an IFA - they may advise switching your residential mortgage to interest only and investing the proceeds of your sale (plus the capital you are no longer paying) into a high returns savings scheme.
You may wish to downsize on retirement and use the equity and savings for property and retirement.

MNs is pretty risk adverse in general but an 800k mortgage on a 130k income is a lot. Property isn’t what it was & the good days aren’t coming back for some time.

I agree with this, @YellowDaffodil25
We live in London, and moved areas (approx 3 miles further out), and managed to get a larger house for half the price of the existing one (that we then kept and rented out for 7 years - before we then sold as mentioned in a previous post).

Could you look at shifting areas slightly for your main house, to enable a reduction in mortgage size, while still keeping kids at same schools and same social networks? Or downsize more locally - and you could find a cheaper house that has the potential to extend if needed at a later date?

In tandem with selling the rental property, you could look at really minimising your remaining mortgage this way. Or downsize main property, and also transfer the rental property into the non-working person’s sole ownership (I think you only pay duty (can’t remember if it is stamp duty or CGT) for the value of the remaining mortgage when transferring ownership - but if you own it outright then I think no duty to pay - but you need to check this, as it is a hazy memory!!). A rental property owned outright by the non-earner is much more financially viable…