2nd home move to buy to let mortgage?

[polo1]

Hi

I am planning on moving into the house that I am building in September and renting out current home.. I have a mortgage in my sole name on this home (had before married) and my Mr Polo1 is getting the mortgage on the new home build in his sole name.. The bank has told me that I will need to move my Mortgage to a BTL mortgage on the home that I am planning on renting out? Is this the case or can I continue with the mortgage that I have?

Also can someone tell me if the mortgage is higher than the income from rent on 2nd property do you still have to pay tax on this or can you write it off? I am not sure about this and tried to find info on the revenue site but to no avail..
thanks,

 

[matc66]

Re: 2nd Home move to Buy-2-Let Mortgage??

I'm in a similar situation to yourself, considering the options about moving home and renting out the old place. You can definately just stay with your old mortgage and just get a new one to finance the new build. Buy to Let is just an investment option where you typically get an interest only mortgage with a view to paying off the principal when you eventually sell the old house.

About the second question, I'm afraid you have to wait for someone more knowledgable.

 

[xeresod]

Re: 2nd Home move to Buy-2-Let Mortgage??

Also can someone tell me if the mortgage is higher than the income from rent on 2nd property do you still have to pay tax on this or can you write it off? I am not sure about this and tried to find info on the revenue site but to no avail..
thanks,

Only the interest portion is tax deductable. For example, if you have mortgage payments of 12k pa of which 6k is interest and rental income of 10k pa, then you will pay tax at your marginal rate on 4k. Obviously it is not that simple as you can claim other deductions, look at some of the posts in the property investment and taxation forums to get an idea and read Revenue's guide to rental income [broken link removed].

 

[davidoco]

Re: 2nd Home move to Buy-2-Let Mortgage??

As pointed out by xeresod it would be in your interest (no pun intended) to have the bank now call it a "buy to let" mortgage for the reason that you can offset the interest paid against income. There shouldn't be any legal costs involved.

What I would do if I was in your situation and if I was a 42% tax payer, I would remortgage the existing house for a repayment amount that would maximise the tax relief available in offsetting the income from the rent against the interest paid.

For example (rough figures no allowance for expenses on rental property)

Existing mortgage A 100,000
new house mortgage B 150,000

So Remortage A for 200,000. Rent it out for 800 pm. Approx interest payable per month 550, so income tax payable at 42% of 250. You then only need a new mortgage of 50,000.

What you need to remember is that interest paid on a rental property gets tax relief at 42% because you avoid paying the tax on the income and interest paid on PPR only gets tax relief of 20%.

If you post some figures of existing mortgage amount, new mortgage amount and how much you would hope to rent out existing house for I can do the figures for you.

 

[cloughy]

Re: 2nd Home move to Buy-2-Let Mortgage??

no benefit in bank calling it a buy to let mortgage now, and all pre-letting interest in not tax deductable (thats my understanding anyway, similar to pre-trading expenses not being an allowable expense), so only when you move out and make it an investment property and have tenant can you deduct interest against your rental income to work out taxable amount.

From your message
"For example (rough figures no allowance for expenses on rental property)

Existing mortgage A 100,000
new house mortgage B 150,000

So Remortage A for 200,000. Rent it out for 800 pm. Approx interest payable per month 550, so income tax payable at 42% of 250. You then only need a new mortgage of 50,000"

The above will not be of any benefit from a tax point of view, and actually cost as you will have reduced TRS as the amount of the mortgage is restricted to your current mortgage, so can't remortgage to the max and claim a higher interest deduction. as I mentioned this will actually cost money, or if advice followed by the above would be in breach of tax laws and could cause problems in the future re interest and penalties on incorrect tax payments. If in doubt seek professional advcie.

These and other topics have been discussed in great detail in other threads.

 

[polo1]

Re: 2nd Home move to Buy-2-Let Mortgage??

As pointed out by xeresod it would be in your interest (no pun intended) to have the bank now call it a "buy to let" mortgage for the reason that you can offset the interest paid against income. There shouldn't be any legal costs involved.

What I would do if I was in your situation and if I was a 42% tax payer, I would remortgage the existing house for a repayment amount that would maximise the tax relief available in offsetting the income from the rent against the interest paid.

For example (rough figures no allowance for expenses on rental property)

Existing mortgage A 100,000
new house mortgage B 150,000

So Remortage A for 200,000. Rent it out for 800 pm. Approx interest payable per month 550, so income tax payable at 42% of 250. You then only need a new mortgage of 50,000.

What you need to remember is that interest paid on a rental property gets tax relief at 42% because you avoid paying the tax on the income and interest paid on PPR only gets tax relief of 20%.

If you post some figures of existing mortgage amount, new mortgage amount and how much you would hope to rent out existing house for I can do the figures for you.

Thanks for this Davidoco

Existing Mortgage is approx 340,000 (will have over 2 years paid by time to rent) works at about 1500 per month (yes late to market - had to buy cause of PP issues / delays)

Potential rental income will be max around 1200 per month.

New house mortgage is €345,000 (value of house will be approx €1.5M once finished) May not draw down full amount as have some cash.. (up to roof level at moment without d/d)

Both salaries a/c for 120K and both at higher tax bracket

I appreciate your help with this. Have also started to look into getting a accountant to help with this but initial advise is helpful.

Thanks,

 

[cloughy]

Re: 2nd Home move to Buy-2-Let Mortgage??

cbased on your figures, the 340k current mortgage is what is allowable to be claimed against rental income.

340 @say 4% 1,133 p/m
rent 1,200 p/m

there would be no tax, as you would have some expenses.

You should max the repayments on PPR mortgage, even to the extent of only paying interest on investment mortgage, as every € you knock off the Investment mortgage will cost you in extra tax, so better to pay that € off PPR mortgage, so same overall repayments/debt but lower tax. See the worked example in a previous thread I did.

 

[davidoco]

Re: 2nd Home move to Buy-2-Let Mortgage??

the amount of the mortgage is restricted to your current mortgage, so can't remortgage to the max and claim a higher interest deduction.

If that’s correct then what I said about transferring the debt over is out the window.

In this case there is plenty of debt on the existing property to avail of the deduction for income tax purposes ie she will avoid tax on the income (rent) she receives to pay the interest (340000*3.5% int *42% tax) therefore save about 5000 full year.

I presumed you could load up the rental property with debt. A person in a similar situation but with a much smaller debt on the existing property would probably be better off selling it and mortgage a different property on a buy to let basis to milk the tax benefits.