Re: Remortgaging and Letting

I have already asked my lender ( Standard Life ). They said they would ring me back and never did. I am getting slightly annoyed with Standard Life, they only passed on 0.1% of the last two rate cuts. Besides, if I am raise the capital to buy somewhere else I will need to remortgage anyway. My choices are to try and talk my father into a joint application or going for a lender who doesn't care about my lack of income ( at least not enough to ask for proof ). Any suggested lenders?

I have spoken to the local Inland Revenue office and they said that if I purchased a place as Buy-to-Let it implied that I wasn't residing there and that therefore it was subject to CGT. I have also just had some information from The Money Centre which seems to make the same implication. Their solution is to keep on refinancing the loan rather than selling. I'm not entirely convinced by this since I still have to repay this loan at the end of the day, but if my loan is interest-only, and interest can be claimed back against tax, does this imply that I don't have any mortgage payments ( at least while the house is occupied ) in either case? If this is true then it would follow that I should always borrow as close to the maximum allowed LTV as possible.

It looks like I'm going to need a BTL mortgage anyway. I am the sole owner of my house and my mortgage.

Are you implying that you don't think this is a good time for BTL? Can you explain why? Although the mortgage rates are very low there are still not too many first-time buyers. I would have thought that the rental market was doing okay. Neither do I think we are heading for a crash in house prices although they may go down a bit. In fact, I think there may well be an upwards blip when we ( eventually ) join the Euro, although I think the window of opportunity will be quite small. I can't see the UK experiencing the kind of boom that other countries have seen.

Much depends on my job prospects. I am an embedded software engineer and although the industry is possibly on the upturn it is on the upturn from a very deflated state and I could still be out of a job well into next year. In about three months time I am going to have to start asking relatives to pay my mortgage or sell the house. But I don't particularly want to sell it because I still think that it is a good investment. Which is why I came up with the idea of letting it. I suppose the alternative is to rent out rooms and continue to live there but I really don't take to communal living. If I get a job here then the property in Eastern Europe would just be an investment/holiday property. If the current job situation persists then I would live there and try to survive on my rental income. I am told that you can live in Slovakia on a budget of about $3000 a year. Maybe a bit optimistic, but I may be able fund myself one way or another. Also I expect this property to appreciate in value quite a bit.

You could always take that as an OK, i.e. they haven't said no. :-)

Still worth asking SL if they will up your loan. But do see a mortgage broker. It'll cost you nothing.

Hmm.

One of our regulars keeps mentioning Bank of Scotland.

It's not the type of loan that's relevant. Whenever you sell a property that has not been your main home for the entire duration of your ownership of it, then there is a potential CGT liability. So it's the fact that you're letting it that matters, not what kind of loan. But if the property has been your main home for part of your ownership, this will reduce the liability, often to zero.

It can be set against rental income, not against tax.

Here's what it means: Suppose your house is worth £100k and you have an existing £50k loan secured on it, and you raise an extra £30k to get to the typical max LTV of 80%, to give you enough to buy your cheap Slovakian hovel. Suppose your loan interest rate is 5% and your rental yield is 6%, so you would collect £6000 rent each year, and pay out £4000 in loan interest. Only 5/8 of the loan was used to buy the rental property, so £2500 of the interest counts as a business expense to be deducted from your rental income. If you're using a letting management agent, he might take a 20% cut, so that would be another £1200 away. Budget another £600 or so for insurance and maintenance, and you're left with a profit, for tax purposes, of £6000-£1200-£2500-£600 = £1700. If that's your only income, there's no tax payable since it's below the £4615 threshold. You still have to pay the rest (private part) of the loan interest, which is £1500, so all you're left with at the end of the year is £200.

You can do the calculation a different way, leaving tax-think to one side: £6000 rent in, £4000 interest out, leaves £2000. Take away agent's fees of £1200 and I&M of £600, and that still leaves you with only £200.

As you can see, the agent's fee is the biggie which really cuts into your profit. If you could eliminate or reduce that, the picture could look a little brighter.

There is a pretty high chance that house prices are peaking, and for this reason borrowing a high proportion of their value risks exposure to negative equity. If you also suffer tenant drought, and the risk of this is something for you to assess, you will be in negative cashflow too, since you have to keep paying the loan interest even when there is no rent coming in (you should have adequate cash reserves to tide you over short term gaps, called "voids"). The debt will need to be repaid at some point, and low income means it will take longer. Much of the debt will still be there after the lender repossesses the house and sells it for a pittance.

Sounds great. Lying in bed writing software. :-) Maybe you should diversify. Get out of software. Try window cleaning or becoming a letting agent.

Can you be a bit more specific? I have been living in the property for three years. Would a change of mortgage affect the situation at all?

I still don't understand this. Firstly, do you mean a loan interest rate of 4% ( rather than 5% ) in the above example? Also, it seems that the 5/8ths that you mention is a complete red herring as you seem to confirm when you redo the calculation without it. I can't work out anything from the above other than the obvious truism that my outgoings are set against my incomings.

No. There are two taxes of concern. CGT when you sell, and income tax on the rent you collect. The mortgage has no relevance whatever to whether and how much CGT is due. CGT would be due even if there were no mortgage. Put simply, if it's been your home for half the time then half the gain is taxable, but if it was ever your home, then the last 3 years of ownership always qualify for "home" status even if the facts are different.

The only relevance of the mortgage is to income tax, in that interest on the loan used to buy (or improve/repair) the property being rented may be treated as an expense, to be subtracted from rental income, along with other expenses like repairs and insurance, to arrive at a profit amount for income tax purposes.

If you have owned the place for 3 years and lived there the whole time, then if you start renting it now for another 3 years, and then sell, no CGT is due because all 6 years qualify for Private Residence Relief - the first 3 by actual "home" use, and the last

3 by "pretend" home use from the so-called 36-month rule. In fact you could probably stretch it to 6 rental years, if the gain isn't too big, by taking advantage of Lettings Relief.

No. With an LTV of 80% on a house worth £100k, the loan is for £80k, and 5% of £80k is £4k.

In your specific case, assuming you have no other income, it is indeed a red herring. However, in general, if you did happen to have enough income to be paying income tax, then it would make a difference, namely that only £50k of the loan qualifies, and the other £30k does not. Because 5/8 of the loan qualifies, 5/8 of the interest can be set as an expense against rental income.

Yes, but if you did not have spare personal allowance to absorb your rental income and shield it from income tax, things would look different:

£6000 rent in £2500 interest out (business part) £1200 agent's fee out £0600 insurance and repairs out

----- £1700 pre-tax profit from rental business £0374 income tax out

----- £1326 after-tax profit £1500 interest out (private part)

----- £0174 net shortfall :-(

The loan interest on the 3/8 of the loan *not* used to buy the property being rented is not a legitimate business expense and therefore has to be paid from after-tax profit (or in this case, since they are insufficient, from other sources).

Does that make it any clearer?

In article , Ronald Raygun writes

And keeps using them with great effect. I hate having to jump through the hoops necessary to prove self employed income.

Are you suggesting Richard knows the secret handshake?

In article , tim writes

They were no different at my first mortgage with them in 1999 to now, 3 mortgages later. They have done 1 mortgage for my partner without problems, and they did not know her.

I'm suggesting that they already have his 'details'.

What would be the need to ask for 'three years accounts' today if you asked the same thing 'n' months ago when he took out the previous loan

tim

In article , tim writes

They are non status loans and they havenever seen my accounts. I recommended them to someone a while ago who wanted to borrow £400,000 on a £550,000 purchase without accounts - no problem.

They don't care. They know that if someone is risking 150,000 of their own money they're going to make a good go of not defaulting and even if there is a problem they are practically certain of getting their money back.