Getting a Second Mortgage

P

powert

Guest
Hi

I hope that i am not repeating a post here, i am very new to the site but have found the information to be very good. My husband and 1 want to get a second mortgage to buy a property which is priced at 575, we will have to pay stamp duty on this (we are second time buyers) and conveyancing which means the amount in total will be in and around 607 (we estimate).

We have a property which we currently live in and will be renting out which we bought for 240 (6 years ago, and it is currently valued at 420)and we currently owe 73 on this property and plan to rent it for 1,500 a month (we are confident in this amount although given todays market this maybe a little less but not less than 1,200 we hope). It would take us about 5 years at our current repayments to pay off mortgage no 1 and we are looking at a 30 year mortgage for mortgage no 2 given the figure above.

What is the best way for us to finance this new proprty given the information above? Note that we have 35K in cash (maximum) but no more than this and we have been advised to offset the mortgage interest relief against the more expensive property i.e mortgage no 2. The banks are obviously very careful re lending at the moment and one of them want us to extend the mortgage on property no 1 to finance the new mortgage as the maximum we can hope for is a 95% loan. I can see the logic here re security but our aim is to have no mortgage on property no 1 in the next 5 years.

I hope that this makes sense, we obvioulsy want to clear the first mortgage in the not too distant future and we want to do all of the above in the most cost effective financially efficient way possible. I should add that we both have secure jobs and we are paying back 1,200 pm on the mortage that we currently have. Any advice is very welcome. If i havent posted enough info please let me know.

Regards,

powert
 
it does not make sense to pay off the mortgage on an investment property when you could be reducing the mortgage on your PPR
 
powert said:
Hi


What is the best way for us to finance this new proprty given the information above? Note that we have 35K in cash (maximum) but no more than this and we have been advised to offset the mortgage interest relief against the more expensive property i.e mortgage no 2. The banks are obviously very careful re lending at the moment and one of them want us to extend the mortgage on property no 1 to finance the new mortgage as the maximum we can hope for is a 95% loan. I can see the logic here re security but our aim is to have no mortgage on property no 1 in the next 5 years.
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Hi there

Mortgage interest on the old property, once you rent it out, is fully offsettable against rental income, whereas for your new PPR, you will only be able to offset up to 20k @ 20% (assuming married couple). The rental income would presumably be taxed at 41% though so you would be getting a better deal offsetting the mortgage interest on your investment property rather than your PPR. That said, as far as I know (from posts here), you can't offset the interest on a top up for your existing house against rental income unless you are using that to improve the house itself - you can only offset the mortgage to the extent used to buy or improve the property. So adding more mortgage to that property if you aren't improving it would not permit you to offset the increased interest against rental income and you'd be getting better tax relief on your PPR. I disagree that you should try and clear the mortgage on your investment property as soon as possible - you'd be better off making additional payments on your PPR and getting that mortgage down instead.

One slight wrinkle is the difference between the interest rates for the investment prop and the PPR. As the mortgage on the investment property is quite low, you won't be paying a huge amount of (offsettable) interest. If the difference between the 41% of the interest that you are paying (which you are ofsetting against income tax) and the additional interest you pay on the investment property (diff between rates for PPR and investment prop) is small, then it's much of a muchness as to which mortgage you pay down with your extra money.

Hope that all makes sense - it's a bit early here in Sprite-land!

For my money, I'd take the extra mortgage on the PPR (lower interest rate) and then make extra payments against that and just make normal payments against the investment property.

Sprite
 
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WaterSprite said:
Mortgage interest on the old property, once you rent it out, is fully offsettable against rental income
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Just to clarify - only interest on the amount outstanding at the time which was used to purchase or renovate this property can be offset. For example you cannot secure the mortgage for the new property on the former PPR and then write off the interest on the additional amount against rental income. Lots of people ask about this or assume that they can but you can't.

For more general information on converting a former PPR to a rental property see the Property Investment forum, FAQ, key posts and the many existing threads on this sort of issue.
 
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