BTL mortgage or mortgage on main residence and cash buy

[Myeyesmyears]

Basically weighing up options for an exit from London, retaining a foothold and making it work for us

Currently establishing value of our property. Assuming we can get what we want for it and if we keep a similar mortgage amount we could potentially buy a nice house outside London and a small property in town. (property in town may be rented as a whole or me and DP might keep a room and rent out a couple of rooms to either lodgers or Air BnB/short lets - is in a trendy part of town - young professionals & hipsters - DP will be commuting but may need a place to stay too).

Question: is it cheaper/allowed if we take out a mortgage on the main residence property rather than a BTL mortgage. For example if we sell for 1.5m and buy a 1m property out of town with mortgage of 375k we'd have enough cash to buy a small house in town.

I can't find anything about this arrangement but it must be cheaper to have a mortgage on main residence than smaller property

cant see why not. me and dsis are considering raising money against our homes to buy dmum a retirement flat. taking a small mortgage each against our homes seems the cheapest way of doing it

Yes lots do this

Ah ok.

For some reason I thought it would be frowned on, but I can't really see why!

A residential mortgage will normally be cheaper and have fewer caveats than a BTL. Just check the LTV thresholds on your mortgage rate to make sure you're not shooting yourself in the foot.

If you own the London property that you want to rent outright then you have more flexibility - very few mortgage lenders approve short term or air bnb lets unless the mortgage expressly permits this.

I'd get advice on the stamp duty - you'll pay an extra 3% on the second purchase so a big chunk!

By the way, it's treated as two separate transactions so nobody to 'frown upon' it. How you finance it is up to you.

Yep I thought it would mean we could be more flexible with it.

Could be great to have a London pad with no personal stuff in it to stay, holiday let, and so on.

Loan to value would still be a lot less for main residence than our current property (in 2009 we borrowed 375k for a 510k property - so same loan for a 1m property should be better.... surely

Yes, but borrowing doesn't work the same way anymore. The mortgage review means they look at affordability now, not just LTV ratios.

For example, my friend earns 80k pa but because she has two boys in private school she really struggled to get a mortgage agreed on a fairly small loan.

Right yes,

I've filled in the ridiculous affordability form with my broker so hopefully this still works

Yes perfectly possible make sure you factor in the extra stamp duty for a second home it is higher than standard. Affordability is different for buy to let as done on expected rental income rather than income and expenditure which is how a residential mortgage is calculated

Ah so in some circumstances BTL might be possible where affordability checks on residential fails?

So stamp duty for a second home costing 575k?

£36,0000 according to the online calculator.

Yes there are times when you can get a BTL when fail the affordability on a residential. Also worth considering that for the next couple of years that the interest on the BTL mortgage can be offset against the rental income.
Will be stamp duty on both new purchases, main residence has a lower rate applied that BTL. 1 million main residence purchase would be around £43,750 and BTL at £575,000 would be around £36,000
If you mortgage broker has not spoken to you about the implications I would strongly suggest a different mortgage adviser!

Check the tax situation.

You will need to pay tax on the rental income you receive. You used to be able to offset the interest payments on a mortgage against this (I'm not sure if this has recently changed or due to change). You will only be able to do this if the mortgage is on the BTL property, you won't be able to do it if the mortgage is on your Mai residence.

www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income#mortgage-costs

Yes I know we'll pay tax on income. Broker on holiday while I've had this bright idea so I'm sure she will put me back in the land of the living when she returns next week

Interesting if exhausting exercise to explore the different options.

Hmm

Sorry - was trying to make the point that there will be different tax implications depending which property you get the mortgage on. If the mortgage is on your main residence you won't be able to offset the interest payments on the mortgage against the income you receive.

What is more common is getting the maximum mortgage possible on the BTL, then funding the balance via a remortgage of your main residence (I'm an ex-Broker turned Accountant).

Ah ok. Interesting so it may actually be better to be cash on main residence. We're both freelance and have accountants I just haven't run it past them yet.

I suppose if you're letting the house here's nothing to stop you keeping a room for yourself. Any advantage/disadvantage to that?

Most Lenders offering BTL mortgages will require the property is let on an AST (Assured Shorthold Tenancy). If you were to retain use of the property yourself I do t think an AST would be possible, what you'd effectively have instead would be a Lodger. Most BTL mortgages will also probably not permit AirBnB as the soured rental income, some may permit short term let's (eg holiday lets) but your choice of Lenders and rates will be restricted.

Definitely an area to listen to the advice of your Broker & Accountants before decided what it is that you're looking to buy.

Apologies for the typos

Right thanks @fruitbadger that's all really useful.

Will think how flexible we need to be. Was thinking three bed house, two lodgers. Will look into that two because I know you're allowed to have a certain amount from lodgers tax free.

Will get onto the people in the know

Nothing to add on the financing side, but I'd suggest you also look more carefully at the practicalities of this and see if it suits you. There are many regulations and requirements that apply to landlords, from checking eligibility of tenants to be in the UK through Legionnaires' Disease risk assessments and others.

If you go down the AirBnB route, you need to factor in some poor sod hanging around with keys while your guests find there way from Stanstead to Shoreditch (or wherever) at 11pm (or install key-code entry), and get cleaners and launderers involved.

All doable, but it does require time and consideration.