Let to Buy

Narj · 11 Aug 2017 at 13:21

Has anyone gone through the process of letting their current property out to buy another? Obviously I'm going to seek professional advice but I'd like to see how others dealt with it.

Basically I want to let my house out to a family member as it's way too big for me, he needs a bigger place and I want to downsize and move to a different area. Not much left on mortgage so plenty of equity, rent on my property would be 2.44 x the mortgage repayments. I'd like to continue overpaying, leaving a "profit" of £450 pcm. I'd like to put that towards paying a mortgage on another place.

I'm a bit confused about the tax implications and it sounds like a massive ballache trying to get two mortgages agreed at the same time. I could delay my plans and try to pay the mortgage off on my current place - I take it that would make things easier?

Anyways if anyone's done this and wouldn't mind sharing how it went, I'd appreciate it!

RoyMi6 · 11 Aug 2017 at 13:37

In the first instance, you'll need to talk to your current mortgage provider to get it changed to one that allows you to let your property out. There can sometimes be a charge for this.

Getting a second mortgage isn't an issue. All your income vs outgoings are compared. So if you're paying a mortgage on the property it simply gets listed as an outgoing expense. Rent from property counts an income. They should cancel out and have little effect on your affordability.

Of course, remember to factor in insurance for your property you intend to let.

The biggest cost you'll likely face is inflated stamp duty (which changed in April 2016). Under the changes anyone buying a second home, or a house with the intention of "buy to let", is charged an extra 3% on top of the standard stamp duty.

You're obviously doing things a little different, and while I can't say for sure, it would seem like a massive oversight in the implementation if you weren't also liable for this for this increased stamp duty.

PlacidCasual · 11 Aug 2017 at 13:41

Apart from the family member bit this is what we have done. The old house is effectively a buy to let on the original mortgages, I don't think we had to change them. Then we use the income to pay the mortgage, pay our tax and agents fees and have a mortgage on our current home. It was all considered in the affordability process for our new mortgage. It went fairly smoothly but we had a humping deposit for our new house 25% I think and good equity on the old place 60% so the mortgage company is quids in whatever. I think the real limitation is we have all our mortgages with the same bank to keep them happy but it works for us. We need an accountant to help with self assessment some years. Oh and don't forget to get a few valuations of your old house whilst its your primary residence then if and when you sell the tax man will only want to tax you on the profit from the increase in value whilst it was a buy to let not all the increase whilst you've owned it.

Kemik · 11 Aug 2017 at 13:45

Biggest financial hit will be:

One time stamp duty (3% on top of current rates for sole home)
Ongoing tax is calculated on: Revenue less repairs and certain other allowances = Gross. Multiply by your marginal tax rate (20% or 40%). Deduct 20% of your mortgage interest (NOT full mortgage repayment). That gives you the net tax you would be paying each year assuming you have a job, etc.

Skillmister · 11 Aug 2017 at 13:46

RoyMi6 said:
You're obviously doing things a little different, and while I can't say for sure, it would seem like a massive oversight in the implementation if you weren't also liable for this for this increased stamp duty.

Definitely will be hit by the extra stamp duty. They've thought of all these scenarios

RoyMi6 · 11 Aug 2017 at 13:52

Skillmister said:
Definitely will be hit by the extra stamp duty. They've thought of all these scenarios

Well, with the government asking people to boycott Amazon because they're "not paying enough tax" it seriously wouldn't surprise me if there was some simple way to get out of it!

Narj · 11 Aug 2017 at 13:52

~12K Stamp Duty is going to be a bit painful but I've already accounted for it. I'm guessing that then means I'd probably be looking at leveraging equity on my current property to help with a deposit - or would this be unnecessary if both mortgages were with the same provider?

Thanks for the input all

RoyMi6 · 11 Aug 2017 at 14:35

Narj said:
~12K Stamp Duty is going to be a bit painful but I've already accounted for it. I'm guessing that then means I'd probably be looking at leveraging equity on my current property to help with a deposit - or would this be unnecessary if both mortgages were with the same provider?

Thanks for the input all

Again, as far as I'm aware, each property will be considered separately. Consider that if you only had 1 year left on your current mortgage, the mortgage company couldn't rely on that property as equity as after 1 year it would no longer belong to them.

So yeah, if you're buying a second property and looking to get a larger deposit it may mean remortgaging your current property to allow you to release funds to make this happen. It's obviously a balancing act for whatever works out best depending on the respective costs of each house.

Don't feel obliged to keep it all with one mortgage provider. The "hassle saved" from dealing with one provider doesn't mean any less potential for them to screw something up. Definitely shop around.

I actually just came back to comment on the TAX thing. By no means should it put you off doing it, but as @PlacidCasual points out, you'll have to declare the income from the property and fill in a self-assessed tax return. Remember that any money you earn over £33.5K a year is taxed at 40%, so your calculations of rent being 2.44x the mortgage value of a new property might be somewhat out unless you've taken this into account.

Narj · 11 Aug 2017 at 14:36

Hrm someone has suggested to me that I have enough equity to possibly remortgage and buy a smaller place outright, leaving all the debt on my current property and just one mortgage. That might work better. The current property could do with a new roof so I could put that down as an expense for tax purposes.

Time to find an IFA and an accountant to suss this out

Thanks for the insight

samcat · 11 Aug 2017 at 16:28

Narj said:
Hrm someone has suggested to me that I have enough equity to possibly remortgage and buy a smaller place outright, leaving all the debt on my current property and just one mortgage. That might work better. The current property could do with a new roof so I could put that down as an expense for tax purposes.

Time to find an IFA and an accountant to suss this out

Thanks for the insight

Definitely talk to and IFA and an Accountant that are familiar with rental tax rules etc.. In my case it made more sense to have the main residential mortgage larger and as small a mortgage as possible on the rental, but you need to look at the rates on both to see where sits best and to see the big picture. The two things are interlinked, and its important to understand and take into account the rules in place now and also the rules that are known about and are coming into place over the next couple of years... Some of which might make you reconsider being a landlord.

And get some landlord training, NLA or similar (just become a member, the training is free).. There is quite a bit of red tape to being a landlord and if you get it wrong it can be expensive (tenants claiming the deposit back in full and upto 3x the deposit from you as a penalty... even if they trashed the place). Do lots and lots of research!

Skillmister · 11 Aug 2017 at 16:51

RoyMi6 said:
Well, with the government asking people to boycott Amazon because they're "not paying enough tax" it seriously wouldn't surprise me if there was some simple way to get out of it!

The guidance notes make for interesting reading (if that's your thing). Virtually every situation thought of and accounted for :eek: