Will this work? Buying a second house.

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We own a house in London but are going to move out of London for quite a specific reason and period of time (10 years). I'm afraid if we sell our house we will never be able to afford to move back in. It turns out the house is worth quite a bit more as a rental than I realised. It would pay its own small mortgage plus management fees etc with a good chunk left over. Could we remortgage our current house and take some equity out and use it as a down payment for a another house? The current house could easily service the increased mortgage. Is this mad? Could it work?

Yes you absolutely can. Just done it, in fact. Go through a financial adviser though, not a bank. They’ll find you a mortgage that suits you circumstances.

Yes you can and it’s a very sensible plan. But as a renter in London - please be a good landlord and keep the house in good nick!

Yes, it could work. However you need to be fully aware of all of the potential implications for future tax etc. You will also almost certainly need to change the mortgage to a buy-to-let, since it sounds as though you are planing on a getting a second mortgage for your second home. You will be liable for higher rate stamp duty on the second home you purchase also (although you will be "replacing your main residence" this rule applies to selling one property and buying another). I would advise you to see a good financial adviser who specialises in mortgages.

@KirstenRaymonde It's been fully renovated over the past few years so it's in very good nick. We will need to figure out how much money to put aside year for maintenance. I'd be hoping to find long term renters who would look after it. We don't need to charge market rate rent so hoping we could be a bit choosy?

Any ideas on how to find a good financial advisor who specialises in mortgages?

On my list so far are:

Understanding the tax implications
Stamp duty
Sorting out how much to put toward a maintenance fund each year
Speaking to the bank about turning the mortgage into a buy to let mortgage (is the rate hugely more?)

Anything I'm missing?

What else

Gas Certificate
Electrical certificate - not legally required but peace of mind and sign of a good landlord in my book.

Hopeful bump

I wouldn't do it without considering -

• whether London properties will realistically rise in the next ten years
• that the rental market in many parts of town is in the doldrums with properties rented well below asking
• you will have to maintain your property which will decline with time; things will break and have to be replaced; tenants will move on and you will have to fix things and repaint etc - all while you are living far away.

It's called a Let to Buy mortgage by the way.

Remember you can get interest tax relief on borrowings upto the full market value of the house you are introducing into the BTl business, not just what you borrow on a buy to let mortgage. So if you have to borrow to buy your new home you can claim interest relief on that borrowing as well.

Remember you can get interest tax relief on borrowings upto the full market value of the house you are introducing into the BTl business, not just what you borrow on a buy to let mortgage

Unfortunately that comment above is entirely inaccurate. I have several properties that are BTL but the ones that are mortgaged are showing poor returns now as a result of the changes made in respect of tax relief .

I suggest you look for advice somewhere other than a parenting forum on the internet

If you PM me I will give you the current state of play on interest relief on BTL properties - you probably won't break even on the course that you are suggesting and the thing that will make it all not work is the new law on interest relief on BTL properties

The first thing is that the increased mortgage on your original house will have to be taken out on BTL terms - that means because you are planning to let the house you have to take out a new BTL mortgage. The terms of these are less favourable than normal mortgages and command a higher interest rate.

The best BTL deals you can obtain will require you to have a deposit of a minimum of 20% and for reasonable rates you will be looking at 25-30%

So this means that the most equity you will be able to release is 75% in the original house.

You will probably only be able to get a repayment mortgage because interest only mortgages on BTL do not exist

Say your house is worth £1m. You will be able to get a BTL mortgage for £750k on 20 year terms. At an optimistic 5% interest rate your repayments will be £5k a month. Say your rental income is £8k a month. The deductible interest component of your mortgage repayments could be say £1k a month.

Except when the tapering laws have gone actually none of your mortgage repayments will be tax deductible. You will be paying tax on your rental income at 45% assuming the rental income chucks you into the highest rate tax bracket - so let's call that £5k a month.

So what would happen is that you would have mortgage repayments of £5k a month and a tax bill of £5k a month and rental income of $8k a month.

This is why most BTL landlords are now either paying off their BTL mortgages or consolidating into property companies.

Which part exactly is do you think is not correct?

She is introducing the property into the bussiness. The current market value is used, not the original purchase price, the capital account is the current market value less the existing mortgage ( it pays if you can reduce the existing mortgage to zero) prior to introducing the property into the bussiness to maximise you capital account. You can borrow it all back afterwards anyway,
Now any money you borrow up the the capital account is eligible for interest tax relief as it is funding the introduction of the property into the Business. This money does not need to be borrowed by way of mortgage. Any borrowing, loan, credit card, mortgage is allowed.

Source: HMRC Guidance BIM45700

In the OP case let say her house is worth £1m. She borrows £500k by way of a BTL mortgage. ( 5 year fix for little over 2%) Uses this £500k as a deposit on the new property also,costing £1m and has a mo4tge of £500K on the new property.

Total borrowing now £1m so can claim relief on borrowing of the full £1m , not the just 500k. This is the power of introducing an assets you already own ( or have a small existing mortgage on) into a business. Very different from going out and buying a BTL with a 30% deposit.

I draw your attention to this

www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords

You absolutely should not be telling people on the internet that they can claim tax relief on borrowing - it simply is incorrect

Allow for gaps when you may not get a rent.

@thesearepearls what nonsenses. Of course you can get interest only Buy to Let and Let To Buy mortgages. I’m in the process of applying for both to create equity to buy a new house in exactly the way the OP describes.

It’s relief on the interest, not relief on borrowing. I am pointing out HMRC guidance to some one in her situation- someone who already owns an asset, not someone buying a BTL property.

Yes fiance costs relief for higher rate tax payers is gradually being reduced and by 2021 a 40% taxpayer would effectivly be able to claim relief on 50% ( 20% tax credit being 50% of 40), of their finance cost, whilst a lower rate tax payer could still claim 100%. Sounds like you are going to be badly hit.

I am opening the eyes of the OP that with some financial planning, In the example I gave above, by 2021, effectively £500k of finance costs are still eligible for relief ( if she was going a 40% tax paper). Which Is even then 100% of the BTL mortgage taken out.

Oh and currently BTL interest rates are more like 2.5% than 5% - although you do need to budget for the likelihood that they will rise.

the only thing i would say.
if you are going to do this you need to be professional about it. do not let it at below market value and assume someone will appreciate and look after it and stay. if you are in it for 10 years start at the correct market rate. worst case scenario you have 10 sets of tenants but you might only have 5 or so. but if you start off at the wrong rate or dont increase as you go along you could end up a long way adrift.

You may not need to change the mortgage; speak to your lender.

When I did this, my mortgage company gave me "Permission to Let", which I have to ask for on an annual basis and pay a £99 admin fee each time.

The mortgage company is likely to have rules about who you can let to and on what sort of tenancy.

Let to Buy mortgage on existing property. Interest only def available, I have done this in the last week. Fixed 2 years at 2.25 %. Available upto 70% of valuation.

You will have to pay increased rate of stamp duty on purchase. This can be quite significant, so be prepared.

If your existing mortgage is a fixed rate or a good deal then you may be able to port that to the new property, with any additional funds required from the same lender but on whatever their best deal is at the moment. You can then do a new mortgage on your existing property with any lender, which may give you a better deal.

Thank you all for the comments. We are 20% tax rate payers as we own a business so take most income as dividends. We have about 75% equity in the current house. To get enough for a down payment on the new house that would need to drop down to about 60% but that still seems like a good number to obtain a reasonable rate? I suppose we will need to look carefully at how how high the rate will be. We are currently on the third year of a three year fix. Hopefully our lender would be willing to do "permission to let" for the remaining year of the mortgage. I suppose in all it seems doable. The London market seems very flat at the moment but I think we'd be fools to think it will stay that way for the next 10 years.

Please talk to your accountant

Also if you take dividends you will still be paying tax on them so your rental income might make you a higher rate tax payer

Hey OP I'm picking up a degree of financial naivety here - not intentionally being rude - honestly just trying to be helpful

Dividends are taxable income. If you have rental income, that too is taxable income. It's actually quite easy to get into a higher rate tax bracket inadvertently. Once you do that, your relief on interest paid on your rental properties is limited.

Why don't you shell out for an hour of accountancy advice? Just to set out clearly in front of you what the tax consequences of the actions are? I would tend to avoid a financial advisor here - financial advisors are usually not qualified to provide tax advice and what you need to understand are the tax consequences of your proposed course of action.