I think unless there is a significant cost saving in extending your own mortgage then you would be better off with the BTL mortgage - it keeps things separate (eg, offsetting the interest payments against tax). The mortgage co might not want to extend your mortgage once they find out what you want to do with the money. It seems odd to me that the payments are less on the BTL than on a normal mortgage - I was always under the impression the rates were higher for BTL. I also don't think you'd want to risk your own roof if there was a downturn and you had to sell the BTL at a loss.
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RichardW
Is it illogical? It must be Citroen....
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>It seems odd to me that the payments are less on the BTL than on a normal mortgage
This surprised me as well. If we take a further loan on our existing mortgage the rate is 5.69% but if we take a BTL we can a get a rate of 5.26%. A further factor is that the amount of the the BTL loan is lower than the further advance as we will have to chip in a 15% deposit. So, lower rate and smaller loan. It is the bit about the downturn that worries me and that I am trying to weigh up the pros and cons about. At the moment I favour the BTL because it seems less risky.
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Surely this is a no brainer once you take into account the effective40% tax relief that you get on the BTL mortgage. I think that you would have problems convincing the IR that an extension on your existing motgage would qualify!
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pmh (was peter)
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How do you guys get this buy to let thing work.?
Whenever I've done the sums and included insurance, maintenance, legal fees, changeovers, inventories, supply of new(ish) bits that I hope won't go wrong (washing machine, boiler etc) and compared it with just keeping my money in the bank - the bank way always wins. Do you hope for major capital appreciation? Curious.
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....Do you hope for major capital appreciation? Curious.
does not have to be that much "major".
see page 5 of :
www.wiredwessex.co.uk/dyn/essentialbusinessfinance...f
and in particular the para. " ... So how does use of debt improve your return ...."
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"Do you hope for major capital appreciation? Curious."
If you're not hoping for capital appreciation - it would be a pointless exercise.
Clk Sec
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How do you guys get this buy to let thing work.?
The trick is remember that you're only investing the equity. If BTL property is (for ease of maths) 100k, you put down 15k and borrow 85k interest only. Leaving aside taxes etc, if the BTL property increases in value to £115k (and a 15% increase doesn't take long at the moment), pay the mortgage off and you've doubled your stake.
If you buy new and off plan and time it right, you can get a 5% discount because the developer needs early sales to get better financing, and in the time between you reserve and complete there might well have been an increase in value. Example: flats i'm doing at the moment - we sold some two beds at £122k (5% off) to get the cashflow and better funding, and now they're valued at £140-145k. Even at £140k, my purchaser only needs £3k plus fees to complete because they can borrow against the current value.
So a top tip would be buy new and early in a development, because the developer may well need your cash (or at least the promise of it).
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It does and there will be no problems. It is what the loan is used for that counts - not whatthe security is.
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... our existing mortgage the rate is 5.69% but if we take a BTL we can a get a rate of 5.26%. ..
are you comparing like with like terms? flexible, fixed, standard, tracker, early redemption, arrangement fees, etc.
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Thanks fo rthe input so far.
>Comparing like for like terms
As far as possible, yes. The funny thing about the further advance is that it can be on different terms to the original loan.
>effective 40% tax relief on a BTL.
Not sure I understand this. Can you explain pmh?
Major capital appreciation is exactly what we ar ein it for. We hope/think to just about break even, assuming no voids. even with voids we won't be too badly off. We have rented out houses before whilst working abroad and it was not too hard to find tenants.
Cheers
Robin
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Well you need to be thinking long term for your capital appreciation. House prices have reached that point where they are out of step again, and need some adjustment. Last month the first time buyers rate dropped dramtically. This means (and the BoE is determined) that house price inflation is due to enter a downturn. So given that house price inflation tends to have shown 5 year dips, and 5 year peaks means you need to be looking at 10 years as a minimum investment term.
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TourVanMan TM < Ex RF >
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hxj
I understand the theory of what it is used for, (ie not what the security is,) but is 'extending' the existing mortgage on the residential property generally accepted by the tax authorities? I can understand that a new additional loan secured on the residential property would be acceptable as it would be easily identifiable. In this case it would surely make sense to fully finance the purchase from a loan, and pay off some or all of the existing residential mortgage from any savings that were going to be used for the purchase.
robin
Assuming that you are a 40% tax payer, you offset the interest on the BTL loan against any profits that you make on renting the new property, ( remember that you can no longer do this on the mortgage for your existing house).
I hope this makes sense.
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pmh (was peter)
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Mare - the "trick"...put down £15k, borrow £85k and you have a £100k property. Insure it, furnish it and pay fees to buy. Say total set-up £4k. Cost £104k. Then prices drop 20% and you owe £9k - some trick. I suppose you don't remember the early 1990s.
Prices just cannot continue to rise as soon, no-one will be able to afford them.
Anyone for a rare and very special tulip? It's bound to cost more next month!
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Mare - the "trick"...put down £15k, borrow £85k and you have a £100k property. Insure it, furnish it and pay fees to buy. Say total set-up £4k. Cost £104k. Then prices drop 20% and you owe £9k - some trick. I suppose you don't remember the early 1990s.
All too well. Bought my first flat as a repo in 1992 for £28k. Someone paid £54k for it in 1990. Same flat is worth £90k now. BTL is a long term investment, and even if you bought the flat in 1990, and assuming a 9k deposit, you've made 90 - 54 -9 = 27k or tripled your money. Obviously buying in 1992 would have been a better result, 90 - 28 - say 4 deposit = 58k or 14.5 times deposit.
I can't deny that the "double your money in two years because it's only the equity" is based on a rising market, because it so obviously is.
I wonder when prices are going to drop, but how do you call the top of the market? People have been saying since 2004 it won't last and it has until now, and in my part of the country, demand is still very strong and supply woefully inadequate. How much longer it will last is anyone's guess and I certainly can't say. All i attempted to set out was how it works, based on course on recent market conditons.
Now about those tulips.....
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I was under the impression that rent from a BTL property had to have a value of 110% of the repayments therefore what the housing market does in the short term doesnt really matter as long as the rent pays the mortgage.In the longer term you end up with a house payed for by the tennant apart from any deposit and costs you have with the property, How long to tie in the fixed rate for would be /is my biggest question at the moment ,would 10 years @5.8% seem like a good bet?
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There are different 'rent / repayment ratios' available. We have seen 100%, 110% and 125% from the same lender. Different interest rates for each ratio of course . These ratios are not calculated from the interest rate you pay but at BoE repo +1% (well, with the lender we are looking at in nay case)
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Robin
Go and see a good Independent Financial Adviser, (Not a Mortgage Broker). Some of the comments here are wrong, a few of them are dangerously wrong.
A good adviser can source the whole of the market for both types of mortgage and explain the pitfalls eg Capital Gains Tax
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Alyn Beattie
I\'m sane, it\'s the rest of the world that\'s mad.
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It doesn't matter WHICH house you use as security for your money when it comes to tax.
Say you have £100,000 cash in the bank. And a house worth £1,000,000 in which you live which has a £200,000 mortgage. You want to buy a £500,000 BTL house. You could:
1. Take your £100,000 and borrow another £400,000 and buy a BTL house for £500,000; or
2. Pay off £100,000 against your house mortgage. Borrow £500,000 and buy that BTL for £500,000. (YEs, I know you won't get a 100% BTL mortgage, but that's not the point here.)
3. Borrow a further £400,000 against the house in which you live, and spend the £500,000 on your BTL.
Why should Gordon Brown care how you do it? He doesn't. You can offset the interest costs of the entire £500,000 against your rental income. So under scenario (1), interest on £100,000-worth of your house mortgage is tax-deductible.
As BTL mortgages are more expensive than BTReside - as tenants tend to take less care of a house than do owner-occupiers - you should probably use your own house as security, and pay 'cash' for the BTL. Why should your own mortgage provider care what you do with the cash? They don't.
And don't forget stamp duty, lawyers fees etc. etc., so make sure that the interest cost applicable to this expenditure is also deducted from your tax computation.
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... As BTL mortgages are more expensive than BTReside ..
so we thought, but the o.p. (robin) says he has been quoted the opposite:
".... a further loan on our existing mortgage the rate is 5.69% but if we take a BTL we can a get a rate of 5.26% ..."
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simply put
Yes and yes
I can help you with your tax for a substantial fee.
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I can help you with your tax for a substantial fee.
Or I could help you for a cheap one!-))
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I'm sure you could!
But I'd always rather receive a susbantial fee than a cheap one.
What happened to your negotiation skills - you should have said "I can help you with your tax for a more substantial fee - but mine would be worth paying" ;-)
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