angrynorth

May need to speak to somebody in private but here's the gist of the situation.

Bought a house in December last year in a great area (Dobcross, Saddleworth) the house was a mess, only one bed and needed fully modernising. We saw it as a bit of an investment opportunity really, as there is only 2 of us the 1 bed wasn't a problem. We paid 77,500, which in this area is stupidly cheap, even for a one bed.

Anyway, we have finished doing it up and had it valued on Saturday at £115,000.

Now as this was our first house, we were thinking of keeping it for a couple more years and then moving into a bigger house, and hanging on to this to rent out. We have only got about £70000 left on the mortgage but now have a nice amount of equity.

Rental prices for similar properties round here are about £450-600pcm for 1 beds.

Is there any way we can do this now rather than hold out a couple more years? I need to move to somewhere where I can set up a full studio as I am working from home more and more now.

If not, how much house could we buy without affecting the repayment price too much?

paulr

Do you mean keep the motgage you took out in December and take another one out to pay for a second house,but use rental income to help pay off what will obviously be a pretty large mortgage bill per month?

angrynorth

Yes, I suppose that would be one way. Could we release / use some of the equity in the current house to help buy the second?

imlach

Yes, you can. You could get a Buy to Let mortgage on your existing property if you aim to rent it out. A lot of lenders won't count this when calculating the amount you can borrow for your primary mortgage, ie, your next house purchase.

However, most lenders only lend up to 85% of the purchase price/valuation (whichever is the lower) on a Buy To let (BTL).

85% of 115k is £99k. Therefore, you could borrow up to £29k more on your existing house if you were to convert it to a 85% BTL.

However, most also add in a rental condition - ie, the yearly mortgage interest payments must be also be something like 85% of the rental income (ie, £500/pcm = £6k/year - therefore your mortgage interest would have to be 85% of this - ie, £425/month. I think the interest on a £99k mortgage would be slightly more than £425/month.

However, don't quote me on the last paragraph....but it makes sense to not go over that guideline anyway, to allow for voids/repairs/maintenance, etc.

Speak to a IFA, and they'll run through the above in detail.

Basically, you can do it, as I've done it before....

angrynorth

Cheers for that imlach

We have got an IFA coming to see us tomorrow, hopefully he can tell us what I would like to hear.

Diesel

MAXIMISE the mortgage before you let so you gain the maximum tax relief on earnings!

I've just been stung by the IR enjoying the value of my equity due to my ignorance. They go on INITIAL purchase price as a rule...nasty unfair basd's!!!

imlach

Diesel - your 1st paragraph contradicts the 2nd.....you can't remortgage to a higher amount before you let just to avoid CGT, and I think they take a dim view on remortgaging before letting just to increase the taxable relief on the interest only part of the mortgage.

They go on initial purchase price for both in theory.......PERIOD.

fast bloke

won't matter - they will base it on the lesser of initial mortgage or purchase price.....didn't we do this last week?

Diesel

Its not to avoid CGT (that is clearly based on initial purchase cost). It is so as you are able to claim the maximum in mortgage interest payments whan you start to offset these against rental income tax.

From what you advised me last week, I would think that as long as this mortgage interest amount doesnt jump drastically AFTER you have been claiming it for some time, all will be well...?

imlach

Nope, as I said above, still goes on intial mortgage and/or initial purchase price....

MartinM

It's still a nice problem to have, don't forget....

...you've raised £29K in cash, the tenants pay the whole mortgage and you pay tax at, say worst case 40%, on the £29K-worth of the mortgage repayment - which by my sums is about £56/month (assuming 6% interest rate)

..as long as you go for an interest-only mortgage...which is what you want for BTL

N1 SPAN

re CGT, any money you have spent on doing the property up etc is also taken into account and by the sounds of it you have modernised the place considerably and this is possibly the main contributing factor to it having increased in value.

While it is still your main residence you could set up a LTD company as a property investment company and sell the property at full market value now to your own LTD company. Your company could borrow 100% of the property value therefore offsetting all of this against tax and you have your cash to buy the next house and much less of a worry regarding CGT when you finally dispose of the property.

Ignoring all the tax options though, a good way to buy another property without selling your current one is Intelligent finance. You must say that you are actively marketing your own property and they are ok with this for 3 months but also never check that you have sold your other property. Ideal for a quick fix or if you have penalties under your current scheme. I think they do 95%. Affordablilty is their main concern.

By the way, nothing that I have posted can be construed as advice, just ideas for you to speak with your financial advisers about. And, you aint seen me, roight...