Hi,
New to posting but have read a lot over the past few months and hoping to get some specific advice/opinions really.
I currently own a house with my wife, we have about 60% equity at today’s valuation.
Thinking ahead (two or so years down the road), we will want to move to a larger house but rather than selling our current house, we would like to start a rental business as a side business.
We already run a successful business so we know what running a business entails and we have done some research over the past couple of months, and know about the legal requirements, risks of bad tenants, etc, but it’s something we want to do for our retirement and also as something we can hand down to our children when the time comes.
What I wanted advice on really is, to buy our next house we would need to release some equity from our current house to use as a deposit. So, we would look to get a BTL mortgage for our current house that would pay off our current residential mortgage, plus enough to use towards our next house (keeping a minimum of 25% equity in the rental house).
Is that doable? Can you convert/remortgage a residential to a BTL mortgage? If so, would it be possible to do it at the same time as buying the new house or would it be better to do the BTL first, get the cash in the bank and then apply for the residential mortgage for the new house?
So, the best advice is to talk to the bank obviously.
I have converted a regular mortgage to a BTL once. What I did was write to the bank (as I was in the middle of a fixed period) and got them to agree to allow me to let the property for the remainder of the fixed term (had to pay a nominal fee). The mortgage was still a normal, residential mortgage. When it was due a renewal it was transferred to a BTL.
However, as you are re-mortgaging to get money for your next house it’s unlikely they would agree to this as they normally require it to be “unforeseen” circumstances. That means you must get a BTL mortgage on the old property and a normal residential one on the new, at the same time. You could probably move your residential to your new one to avoid early repayment fees (portability) and put a BTL on your old house.
Best is to plan well ahead. Agree a repayment free mortgage with the bank on the residential for a few years - put all the “saved” money into a pile (deposit) for a new house possibly.
Yes it is possible to do that on a mortgage. You would need to do at the same time as normally you cant live in a property with a btl mortgage on it.
I doubt it is a good idea because of tax. Will depend on circumstances but for most people it’s unlikely to be a good idea. You would be liable for the 3% stamp duty surcharge on the new property which will be worth more. Eg if your current property is 200k and you want to buy at 400k you would pay £12k which is equivalent to 6% on the rental property and is likely to take a long time to recover.
In addition you are likely to have made substantial capital gains on the existing property which are currently tax free. If you rent it out then in future you are likely to have a substantial capital gains tax bill even if property values decrease in the time you are rent it out as the tax calculation goes back to when you bought it.
A pension is normally a much better way to fund retirement…
Thanks for your replies. Understood about not living in a property with a BTL mortgage on it, so good to know we can remortgage from residential to BTL and get a new residential mortgage at the same time.
One option we’ve thought of to get around the 3% stamp duty surcharge is to set up a ltd company for the rental business and ‘sell’ our current house to the ltd company. I’m not 100% sure on how this would work in practice so would need additional research, but if all else fails, we would just work the 3% stamp duty surcharge into the calculations when we buy our next house, but if it’s our ‘forever home’ an extra 3% won’t really matter in the grand scheme of things.
As I understand it, the capital gains tax would only be payable if/when we sell the rental property and it would be based on the difference between the price paid for the house and the price the house is sold for, which presumably would take into account any reduction in value. At present we have no plans to sell the house but it’s definitely something to consider.
Our current residential mortgage is £600 per month and we can get around £1200 per month rent… With a BTL mortgage we’d be looking at around £750 per month mortgage payment so on the BTL mortgage that would allow a decent profit after tax which could then be squirreled away should anything need repairing or for another rental property in the future, etc.
I’m well aware that it’s not all sweetness and light, but at the same time if you do it correctly (which is why I want to put a couple of years into researching and getting ready to do it properly), there can be good rewards.
75% BTL mortgages you won’t find to the same interest rate as a normal mortgage. And also, there’s almost never one without fees when you renew so budget for much higher, probably around £900 pcm.
£1200 income sounds great but remember it’s not all profit. Count on £100 repairs on average per month. Then £50 insurance and other costs. Leaves £150 profit, which you need to tax.
It means, if your property is empty for one month a year your profit is gone. So be careful and not too optimistic - you get much better returns putting it into the stock market. Not even considering if you need to get solicitors in to get someone out.
Also, if you transfer the property into an LLC I’m pretty sure you’ll have to pay stamp duty (not sure though).
Thanks @Per. The £750 mortgage payments I mentioned was based on a BTL mortgage quotation I received with approx £2,000 fees, however, yes I may be being optimistic.
Stock market is far more risk in my opinion and not something I’d have the confidence to entertain unfortunately - at least with a house, if all else fails I can sell it and get some money back
Yes, it’s possible.
It’s how I ended up with the flat I rent out. A good property was on the market at a good price if I could move fast - didn’t have time to sell, so went to the mortgage brokers to remortgage as a BTL to release equity. It’s called “let to buy” & not all providers offer it, so you do need a good broker.
