Rental income v mortgage interest question

I would really appreciate it if someone could offer some advice.
I own and live in property "A" worth about 160k. This property was purchased
3 years ago for cash, part of which was a 40k loan from my father which I
have been paying off on a 10 year schedule at 5% simple interest per annum.
My dad has a registered charge on property A, and the amount outstanding is
about 30k.
I wish to purchase property "B" for about 200k and ultimately live in
property B while renting out property A (max likely rental income about 1000
per month.)
I do not have any savings and my mortgage broker initially was looking at a
100% interest-only mortgage to purchase property B, although he has since
suggested remortgaging property A to at least raise a deposit for property
B, so avoiding extortionate MIP on property B, and to get me a better rate.
I think this is basically sound advice.
I am confused though as to the position regarding the offsetting of my
future rental income from property A against my mortgage interest.
How much of my mortgage interest could I offset against rental income?
Would it be affected if I remortgaged a higher value of property A and took
a lower mortgage to buy property B?
Also, would it be good to take this opportunity to pay off my outstanding
debt to my father? He is 75 years old and I am his beneficiary in his will,
so to be blunt I would receive that lump sum back again sooner or later.
"Re-paying" him the outsanding 30k via the remortgage would reduce my
monthly outgoings by about 200, if I have my figures right.
Thanks for any advice.
Reply to
Edward Lionheart
You can offset none of it. It is the purpose of the loan that decides and in the IR's eyes the loan was obtained to enable you to buy the house (B) that you live in so none of it will be allowed against the rental income from A. (the arm's length arguement that buying B frees up A so that you can rent it out, counts for nothing here).
You can however claim the interest that you pay to your dad on the loan on A against the rent
No. The house that the loan is secured on is irrelevent.
In the rental scenario, this is the worst thing that you can do.
Reply to
If I *reportage* a property to partially fund the purchase of a new buy-to-let property, are you claiming that the extra interest due to the reportage cannot be offset against the income from the new property
NB In my example both houses are buy to let although the first one was previously the main residence
If so, can you point me towards the relevant Inland Revenue rules on which you base this
Reply to
On Sat, 26 Jul 2003 21:20:01 +0200, "tim" wrote:
This is the only point I take issue with - paying tax on the saving is cheaper than paying the mortgage interest. The only reason for maintaining high gearing is if you've got an investment lined up that pays more than the interest.
Reply to
But he'll be taking out a mortgage on the new property. Presumably if he pays off the 30 K on the old property he'll be taking out a 30k larger mortgage on the new property!
Reply to
Grr. All these non-standard arrangements. "Simple interest", indeed. You mean you agreed to repay 5% for each of 10 years, a total of 50% or £20k, plus the principal £40k of course, making £6k per year.
How do you know this?
Not true.
Remortgaging means different things. Where it means transferring an existing loan to a new lender, this does not change the purpose of the loan. So if he goes to a commercial lender to get a "substitute" loan for the one he has from his father, then interest on that will be just as offsettable against rental income as the original loan was.
But remortgaging can also mean increasing the size of the loan, and often it means both. If he remortgages property A for £60k and pays off his dad's £30k, then basically half the new interest will be offsettable.
True. For offsetting, the purpose of the loan is paramount. Only loans taken to buy or improve a rental property qualify for interest on them being deducted as an expense from rental income.
I disagree. If you take a *replacement loan* it will be just as deductible as the original.
Reply to
Ronald Raygun
Fine so far. Interest on the remortgage will be allowable against rental income from property B.
Fine, but then property B will no longer be for letting, and since the purpose of the loan was to buy B, it will no longer qualify for interest relief.
You are missing that as soon as B ceases to be a rental-income generating property, the loan ceases to be a "business" loan, and so interest on it will cease to qualify as an expense which you may deduct from rental income.
You are also missing that if you have lodgers in B while you live there too, then B will be part-business part-private and you would need, I think, to deduct only an equitable proportion of the interest from income you derive from lodgers.
Once you do move into B, and rent out A, then you have to ask what loan was used to buy A, and the answer is £30k from your dad. This loan will by then have been transferred to a commercial lender, but that doesn't change the fact that it is basically the same loan. So a fraction of 30/(however much the new loan is in total) of the interest will qualify as an expense, plus possibly a fraction, if at all, of the rest if you have lodgers.
Yes. One thing you can do is split the loan into part-interest-only, and part-repayment, and arrange for the interest-only part to be the rental proportion, so that the qualifying interest portion remains maximal and does not shrink as the overall debt reduces.
The latter.
The lender will probably not advance anything while the charge remains, so it will need to be removed, and your dad will be repaid his £30k. The lender will then see a "clean" £160k property and will advance LTV times that whole amount, but the £30k will have to come out of the advance.
Reply to
Ronald Raygun
There is also the possibility of Rent A Room relief. Although the IR might resist its application to multiple lodgers.
Reply to
Duke of Url
Indeed, but that would be instead of all other allowances. You can't get the RAR scheme exemption *and* relief for interest, insurance, repairs, etc, at least not in respect of the same income.
I don't see why how they could, unless either the lodgings amount to a trade, or it derives from several properties. You can only opt for RAR in respect of your only or main home.
I'm not sure whether the option to go for RAR is withdrawn if you also have "normal" rental income from another property.
Reply to
Ronald Raygun
In message , Ronald Raygun writes
'Simple' interest is not 'flat' interest RT.
It just means it doesn't compound.
He doesnt say what the accrual period is, or whether his payments are equal or not. We need to know the answers to do the calculation.
Reply to
john boyle
I think its only 5% overall. I can't dig out the documentation at the moment, but I know I'm paying 317 per month.
It's on the Land Registry entry for the property.
Would it matter what kind of loan I get, a re-mortgage, or a specific buy-to-let product?
Reply to
Edward Lionheart
Hmm. £317 per month for 10 years adds up to less than £40k, so wouldn't even repay the original £40k loan. There must be some mistake. Or does the size of the monthly payment change each year?
I meant how do you know the amount outstanding is £30k? Surely the land registry simply records that there is a charge, and possibly the original amount, they don't keep the balance up to date.
Not from a tax position, no. But it might make a difference to how much it will cost you.
Typically a lender will charge a higher rate of interest if the property on which the loan is secured is not your home, whether it's a BTL product or a "normal" mortgage with bolted-on permission to let.
The thing to bear in mind is that the lender's and taxman's criteria differ. For the lender it's the property on which the loan is secured that is relevant to whether a cheaper home rate or a dearer BTL rate applies. For the taxman it's the purpose of the loan which determines whether the interest is an allowable expense, what counts is whether the loan was used to buy or improve a property which (during the tax year in question) is generating rental income.
What you appear to intend to do is to remortgage property A in both meanings of the word, i.e. switch lender from your father to a bank, and increase the loan to raise a deposit for property B, and also take a new mortgage loan secured on property B.
If as soon as you buy B you will move out of A and let it, then you want the B-secured loan to be a "normal" one (because the rate is lower), and the A-secured one to be BTL. But only £30k of that loan will qualify for tax relief because only that much of the existing debt was involved in buying the rental property A. The rest is to buy a private property B.
If instead you rent out B and continue living in A, then you want the B-secured one to be BTL and the A-secured one to be normal. All the B-secured loan and all but £30k of the A-secured one will qualify for tax relief against B rental income. If you later move into B and rent out A, the positions will revert those of my previous paragraph.
Reply to
Ronald Raygun

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