Releasing equity on buy to let's

[carrottopper]

We have 2 buy to let's. The aim is use them for our pension. If we keep the 25% in, we could release £40k from the equity when out buy to let mortgages are renewed next year and we'd use this money for home improvements/building work.

Can anyone outline the pros and cons for me? Just wondering if it is better to sell them. Our current house is a bit dated and we need an extension as our family grows. We are both mid 40s and it concerns me that we will only have the deposit left in the houses for our 'pension'.

Any thoughts? Is it better to sell? What are the advantages and disadvantages of releasing equity as opposed to selling?

Selling a btl will incur capital gains tax. Raising equity will not. Also, what is the 25% figure you mention ?? Do you mean the ratio of mortgage to the property value (LTV). You may find you cant raise as much capital as you would like because of the rental income you are receiving. Recent changes have meant stricter rules around how much can be narrowed against the rental income being received. Rough rule of thumb for capital raising is ths rental payments must be higher than the mortgage payments @ a rate of 5.5% & then multiples by 145%.

I will also add that your retirement strategy is not very clever. All your assets are tied up in property (btl & residential) and the btl are the least tax-efficient of any real retirement planning.

You need to seek the advice of a financial advisor and start putting your money into pensions & ISA's

By "release equity", I presume you mean borrowing more, i.e. increasing the mortgages. Can you afford the increased mortgage repayments - a BTL mortgage will have higher rates than a domestic mortgage, so would cost you more. Can you not simply "release equity" from your home, i.e. increase your home mortgage?

Also remember the changes in the tax allowability rules on interest - there are now people with tax liabilities higher than the "profit"/positive cash flow they receive from their BTLs so which has to be financed from other income (i.e.wages etc).

Your plan may or may not be a good idea - it all depends on your circumstances etc, income from your main wages, LTV on your home and BTLs' etc.

The advice above is excellent. BTLs are very popular on MN/generally as a 'pension' but I don't really understand why when in many ways they are so inefficient both in tax terms and maintenance/input/risk etc. Of course they can work well as part of a balanced investment strategy etc etc!

Are these properties literally your only pension - are either of you employed/have any previous occupational pensions? If not and you have spare income, I would certainly prioritise some form of pension fund above non-essential house improvements. If you are employed but with a small/inadequate occupational pension you may be able to make additional voluntary contributions. If you/DH are self-employed then there are a wide variety of pension products on the market.

As to what you do with the existing BTLs, as PPs say above, a lot depends on how much equity you have in them, rental yield and what mortgage rate you would be able to get?

I do have a works pension, but I am part time and have no intention of increasing my days. DH is self employed.

We have interest only BTLs and the rental income is more than the interest payment. I do treat it as a repayment and over pay each month with a view to it being a pension but maybe I should be putting this money in my pension instead.

If they are interest-only, presumably you are going to sell them when the mortgage requires repayment unless you think you will pay them off before then by another means? Increasing the mortgage now is likely to reduce the equity available when the mortgage is repaid later on, which isn't what you want really if you are going to sell them. Especially - as a PP has rightly pointed out - BTL mortgages tend to be more expensive than residential mortgages.

Yes I know. I think the idea is that the value of the houses will increase in 25 years and we will then sell, or keep on and use the rental to top up our pension

@carrottopper. That's why they are not very tax-efficient. When you sell them you will have to pay capital gains tax on the increase in their capital value and if you dont sell & rely on the rental income as your pension then you have to pay tax on that income. You lose either way.

An ISA, on the other hand, is totally tax free. Free from CGT and free from any tax on income you may withdraw. And although income taken from a pension is taxed, you can take the first 25% out tax free & money going in is subject to tax relief at your marginal rate.

I inherited the house from my mum and just decided to rent it out. We remortgaged to buy our current house which we would love to extend to support our growing family. It's a hard decision and don't know which way to turn

What kind of rental yield are you getting at the moment OP, I know you say the rent covers the mortgage repayment plus some, but what about your other costs, tax, maintenance, agents fees, void periods etc? If you are still comfortably turning a profit after all that plus the properties are in an area where property prices can reasonably be expected to rise in the medium-long term then it might be worth keeping them for now - bearing in mind how much you'll lose in EA fees, legal fees and tax if you sell up. I'd then try and borrow more against your residential property to do the works you need to, if you are able to, as this is likely to be a lower interest rate than increasing the BTL mortgage.

Then depending on what interest rates are doing I'd be inclined to put at least some of your rental 'profit' into a pension fund or ISA rather than investing any further in property as you do seem to have quite a lot of eggs in the property basket right now, particularly if all the houses are in the same area?

How good is your investment? Is the rent very generous? Ie double the mortgage payment? Is it a high value area so that if you need to replace the roof or refurbish the property, the jobs won’t wipe out years and years of profits?

Overall, the tax regime on rentals is such these days as to put landlords off. Are you sure it makes financial sense for you?

Do you have a clear understanding of things like SIPPs or ISAs, investing in stocks and shares vs savings accounts etc?

I’d say to either make sure you really know your options and then making a sensible decision will be easy (selling vs renting out) or get an independent financial adviser to Make sure you plan properly for the future.