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Original poster

A query about renting out your place, refinancing and buying somewhere else

26 replies

SarfE4sticated · 03/04/2018 00:30

So, we have a flat in London that has about £350k equity in it. I would like to move out of London and buy somewhere outright with the equity plus a small mortgage if necessary. Friends have said that we should remortgage and rent out flat, and use the funds to buy house in cheaper area, living off the rent.
DH and i are very risk averse, so not keen on this at all, seems like a huge risk, but are we missing a trick here? I'm a bit worried about burning my bridges, so the idea is kind of appealing.
What do you think sensible property people?

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TroubledLichen · 03/04/2018 00:38

You’ll pay a shed load in stamp duty as the new place will be classed as a second home. Then you’ll have to declare the rental income on your tax return. And if you later sell the flat, that may result a capital gains tax bill. You need to do your sums and work out if it’s financially viable. But I wouldn’t view what you’re proposing as overtly risky.

Original poster
SarfE4sticated · 03/04/2018 01:09

Where would be a good place to get impartial sensible advice on this Troubled? Solicitor? Bank?

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Madeline18 · 03/04/2018 01:11

You need to talk to an accountant.

snewsname · 03/04/2018 01:13

How much would your mortgage be and how much rent would you get is a good starting point.

Original poster
SarfE4sticated · 03/04/2018 01:16

Gawd even the thought of having these conversations makes me feel a bit anxious

Thanks all!

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Angryosaurus · 03/04/2018 07:14

What LTV do you have in your flat at the moment? Most btl mortgages require 60% so you would have to leave a lot of your equity in your London house (I’m assuming). This would leave you with a bigger mortgage on the new place. We rent out a house with a less than 50% mortgage, and quite regularly the rent we collect doesn’t cover that mortgage due to repairs etc. No way it would pay our own mortgage too!

YimminiYoudar · 03/04/2018 07:23

I wouldn't attempt the rent-it-out option unless you have tried to market it for sale and failed to get a buyer.

The renting option is very risky if house prices fall, and recent legislation makes amateur landlording like this much less profitable. It would certainly be a sensible idea in a rising market where holding off selling could mean adding an extra £100k to your equity. But we are not in that kind of market at the moment. Your friends may be advising you based on scenarios which haven't existed for a few years now.

FinallyHere · 03/04/2018 07:33

Another voice wondering how up to date the advice your friends are giving you, is.

What allowance would you be making, for periods when the house/flat you are renting out, is empty. What allowance for replacing things such as the boiler, or even simple things like a tap leaking and needing to be fixed? Who will manage checking credit references for potential renters, hold deposits and who will collect the rent? Will you use an agency, what percentage of the rent will they require, whether there is anyone renting or not?

If you are truly risk adverse (like me) all this would put you off what your friends are suggesting, even before you get to stamp duty. Beware of asking an accountant the simple question, should we do is, rather than what do we need to consider? They will know that you will need their services if you go ahead, which may bias their answer.

ilovewinterpansies · 03/04/2018 07:59

Lots of sensible advice above.

All I'd add (as someone who is trying to sell a second property because the financial environment is so rubbish for private landlords) is to take into account your current income.

You may get your rent practically tax free (depending on how much it is, and if one of you doesn't work, for example) or you may pay 40% on it if you're both high rate taxpayers. Massive difference to your bottom line.

Original poster
SarfE4sticated · 03/04/2018 08:51

HI All,
You have all given me lots of really useful advice, thanks, and you have all confirmed my feelings of no wanting to do it. Our flat is tired and needs redoing. A lot of things that a buyer wouldn't really mind if the price was right, but a renter would want more surely.
You've put my mind at rest - thanks!

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specialsubject · 03/04/2018 12:10

good news. I would be very surprised if the maths even remotely made sense.

your mates need to get out of the sixties, the days of huge profits from rentals are long gone - at any rate for those that do it legally and decently. The aim of the ongoing changes is to drive out private landloards, which it will eventually do. As this will not reduce rental demand, the only ones left will be the slumlords and the housing associations who are often not much better.

There are also major bear traps for the unwary - for instance if you cannot prove service of a gas safe certificate at the start of the tenancy, a section 21 will NEVER work and you can end up with a tenant that you can't evict. Tenants - if you have a good landlord they will be asking you to sign for all the start of tenancy paperwork, including the latest how to rent. Make sure you know your rights.

wowfudge · 03/04/2018 12:43

We rented out a house we couldn't sell and while the value of the house increased over the years before we were able to sell it, renting it out wasn't profitable in itself.

In your position OP, I'd sell the flat at a price someone is prepared to pay and you can quite possibly buy elsewhere and be mortgage free.

Original poster
SarfE4sticated · 03/04/2018 13:06

Yes wowfudge that is my dream really. I have 15 years left to retirement so would like to start laying down some savings for then. Will need to work out what a good investment for those savings would be though - obvs not property now though!

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JennyJames · 03/04/2018 13:55

We re going down this route and wouldn’t say we have ahigh risk appetite.

There certainly aren’t huge profits to be made (and that’s not why we’re doing it), but our numbers stack, despite the upcoming changes in legislation.

We are, however, putting a lot of time and a fair amount of money into getting the house ready to let, and we are going with a locally recommended management company to assist us in avoiding some of the pitfalls. In addition we have some cash set aside for repairs if needed.

I didn’t find ‘most BTL requiring 60%’... but you would need a fair amount of cash. Our SDLT bill for our second house is £15k for a start...

Original poster
SarfE4sticated · 03/04/2018 17:44

I hope it all works out for you Jenny, it just all sounds like too much worry to me. I will have to feel the fear and do it anyway!
Best of luck to you.

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Sprinklesinmyelbow · 03/04/2018 17:48

It really depends, particularly on where your London flat is. We rent ours out and the area means high rent (£3k a month) so if it was anything similar and you were to buy a £350k house outright to live in I would seriously consider it. If your rent is much less than that I think you’re getting to the point the subsequent capital gains tax would be tricky- but remember you only pay profit on the capital gain so it’s money you never had anyway if that makes sense?

Original poster
SarfE4sticated · 03/04/2018 17:48

That wasn't very clear - sorry - feel the fear but sell up and move anyway.

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JennyJames · 03/04/2018 17:53

but remember you only pay profit on the capital gain so it’s money you never had anyway if that makes sense?

And you also get relief if the gain was made on property that was your primary residence at one point.

Original poster
SarfE4sticated · 03/04/2018 18:02

Hi Sprinkle we wouldn't make that much on rent, it seems to me that most flats go for £1300 pm on my road.

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JennyJames · 03/04/2018 18:04

And what is the flat worth, realistically?

Original poster
SarfE4sticated · 03/04/2018 18:18

They are mostly on at around £490k but whether they are selling at that I don't know. We have c£110k left on our repayment mortgage which costs us around £900 per month.

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Sprinklesinmyelbow · 03/04/2018 18:20

Hmmm. I think you’ll be far too highly leveraged

JennyJames · 03/04/2018 18:36

Ok, so let’s say £475k

We have to put down a 25% deposit on our BTL, so on that basis you’d be able to borrow around £356k against your flat.

Quick mortgage calculator on interest only mortgage gives monthly payments of £594 at 2%. Bear in mind, interest rates WILL rise at some stage.

Factor in management fees and tax would leave you a couple of hundred a month in profit.. but before repairs/unexpected expenditure.

Pay off £110k, leaves you £246k to sink into somewhere else.

What mortgage would you need to buy somewhere else?

It may be worth talking to a mortgage broker to get tailored numbers and they should also talk you through the tax changes that are coming.

I have to say, on the figs I’ve mentioned, I’d be uncomfortable...

TroubledLichen · 03/04/2018 19:05

I think based on the figures you’ve given to sell up would probably be the best decision. Best of luck whatever you decide though!

Original poster
SarfE4sticated · 03/04/2018 23:09

Well it's a relief to hear that it's not worth it, I don't think my poor nerves could cope with it. Thanks everyone Smile.

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