Gransnet forums

Legal & money

Equity release or BTL mortgage? Anybody clued up?

(14 Posts)
LadyBella Sat 19-Sep-20 13:26:16

Our house is worth around £440k. We have seen one we would like to buy at £310k which we would eventually move into. We would need to borrow around £250k to buy it. We would need to stay where we are until my elderly Mum has left (either popped her clogs or into a home) and then sell up. It has been suggested we take out short-term equity release on our existing home to release funds to buy the other property (we'd obviously pay it off from the sale of our existing place once sold). Then to rent out the other property until such time as we are in a position to move into it. It was suggested that the second property would, by then, possibly have increased in value. The reason for this thinking is that the cheaper property is in exactly the place we want to live and houses there don't come up very often. Is anyone clued up on this type of thing? I've heard that equity-release can be dodgy.

Illte Sat 19-Sep-20 13:58:21

I don't know anything about equity release but this is what I know about buy to let.

It's very unlikely that you would get a buy to let mortgage. The amount you want to borrow against the value of the house is too high. Also your age might count against you.

You could raise a mortgage agai St your current property or possibly increase your current mortgage and use that.

You would have to pay the extra 3% stamp tax because you would be buying a second property.

Contrary to what the media might have you believe there are not vast profits in letting and many legal obligations. Taking into account mortgage payments, tax, safety checks, legal responsibilities, upkeep and maintenance plus perhaps agents fees, I think you would find that you may even make a yearly loss. It needs some careful calculation. You need also to factor on the damage that a bad tenant can do. That can be thousands if, for instance, the kitchen needs replacing. The deposit won't cover it.

I'm not saying don't. I'm just saying it's more complex than you might think🙂

Jaxjacky Sat 19-Sep-20 14:40:48

You’ll need professional advice and be wary. On ER the headline on the Marin Lewis site is ‘risky and high interest’

paddyanne Sat 19-Sep-20 14:45:42

Find a good mortgage broker,not a financial adviser ,who will be able to find you a solution.Every landlord has different experiences and many dont have problems with tenants .Rates for BTL are the lowest they've ever been and you can get them on fixed term,but you do need to get professional advice,Good luck,hope it works out for you

bluebirdwsm Sat 19-Sep-20 15:08:18

I have been thinking of downsizing but what I want comes up rarely. I would not sell my place without the right property to go to. The chances of a suitable home being on the market at exactly the time I would want it are pretty slim. I would not want to sell up then rent whilst waiting for one either.

As I have a large deposit I explored the idea of doing ER on current property so I would be able to buy a place outright/cash should it appear...then go on to pay off the ER when I sold current house.

I discussed this a financial advisor who said it was completely possible [obviously incurring expense to arrange] and some ER companies have fixed repayment charges so you can work out exactly what you will owe at the end of the short term. It will cost the arrangement fee and the subsequent repayment charges if I did it...but to secure the right property for me, I am happy to pay for the privilege.

That's just me, but nothing really suitable has come on the market for a while now so am not pursuing it. Your plan is doable but the difference with my situation is the rental bit. It makes it more complicated and letting rules are very much in favour of the tenant and yet more fees/tax returns etc. to sort out. So much can go wrong, but if it works and you have a good tenant it could work for you. I am too wary of renting out to do it personally.

Illte Sat 19-Sep-20 16:03:08

There will be capital gains tax chargeable on the property you let too when that is sold - although that won't bother you if you live in it till you die!

M0nica Sat 19-Sep-20 16:28:20

You wouldn't use equity release for a transaction like this. You should probably go for an interest-only mortgage.

However the best thing to do is consult a financal advisor or mortgage broker who know and understand this market. It can be a minefield.

We are planning a small extension that will both make our house more comfortable for us and make it more saleable, when we downsize and preliminary discussions with our bank and previous mortgage lender suggest that the best way to do this is to have an interest-only mortgage. We have the income to support the interest payments and the capital will be paid off when we sell it.

Dinahmo Sat 19-Sep-20 16:45:41

The amount of tax relief for interest on loans used to buy property for letting has gone down drastically over the last 2 to 3 years so that is something to be considered.

Dinahmo Sat 19-Sep-20 16:52:55

Illte

There will be capital gains tax chargeable on the property you let too when that is sold - although that won't bother you if you live in it till you die!

Only for the period before they move in. So if they bought it, let it for a period, occupied it and then decided to sell it, the gain over the whole period would be time apportioned between the number of months it was let and the number of months it was their main residence.

Missfoodlove Sat 19-Sep-20 17:12:41

Do not even consider equity release.
It is risky and expensive and means there will be a charge on your home from the equity release company.

We are in uncertain times and the property market is likely to take a big hit
The equity in your home could go down dramatically, the value of the 2nd home could also fall.

There is talk of 2nd home owners facing more taxes and CGT is of course a consideration.

A BTL mortgage is your best bet for now.
Always remember it is illegal to reside in a property you have a BTL mortgage on.
You would have to clear this mortgage before moving in.

Illte Sat 19-Sep-20 17:25:56

Yes Dinahmo🙂 That's where it works against the older buyer like the OP. If she let it for 5 years and then lived in it for 15 years a quarter of the gain would be liable to CGT.

Very different to buying something that you're going to stay in for 50 years!

And the rental income might put her into a higher tax bracket.

It's a minefield😱

Davidhs Sat 19-Sep-20 17:35:18

Forget Equity Release.

If you current house is paid up and clear of debt, you have plenty of Equity for a BTL mortgage.
If the rent payments are more than the interest on the new loan, take a variable rate mortgage then you can pay it off when yours has sold. There is no CGT on your present home, on the new house stamp duty is likely and if you change you mind and sell it CGT will be payable.

If there is a lot to pay on your existing house, be cautious

Charleygirl5 Sat 19-Sep-20 17:49:47

Some good ideas have been expressed here but there is another older thread on the same subject where you may pick up other ideas. My first port of call would be financial advice but never in 100 years would I go down the equity release route.

PamelaJ1 Sat 19-Sep-20 18:03:05

When you buy a buy to let the most important thing is how much you would get in rent compared to the amount you borrow. Get a good mortgage broker who can advise you.
You would have to pay a higher stamp duty ( I think- that’s why you need up to date information) but if you sell your current home and live in the BTL within 3 years you can claim the difference back.