Mortgage question

[andrewi]

My wife and I are looking at getting a (first) buy to let property. We'd need a mortgage of about £100k together with about 40% deposit.

The buy to let rates and arrangement fees all seem a significant premium to normal residential charges, and I'm wondering whether we can avoid this additional expense.

We've sufficient equity in our own home that we could easily increase the mortgage on this to get the funds needed to purchase the second property. Is it possible to do this and - from a tax perspective - still claim the interest payment as relief against the income on the let property. If so, is there guidance anywhere on the details, e.g.

- would it have to be a separate mortgage so there's a clear audit trail, or can we just increase the amount on our exiting personal mortgage

- could we actually increase the mortgage by the full purchase price and effectively get a 100% mortgage and offset interest on all this - rather than use our cash savings as a deposit

- what sort of narrative and supporting information do we need to provide the tax man to keep them satisfied

Many thanks,

[partrim]

You don't have to get a BTL - ultimately it depends on your financial situation and how 'reasonable' your lender is. A BTL mortgage is simply a type of mortgage product offered by some lenders. It allows you to have a residential mortgage at X times your annual income and have a 'business' mortgage based on the rental potential of your investment property - at the same time. Otherwise it will look like you are borrowing (for example) six times your annual income which would set most alarms off at most financial insitutions (especially after recent ecenomic events).

If you have a residential mortgage on your investment property you can still claim the interest payments as a legitimate business expense for tax purposes. HMRC don't care whether it's a BTL, Residential mortgage or personal loan.

For the next bit I would suggest talking to a tax accountant. Just for fun, my thoughts are as follows:

If you get a loan to purchase an investment property the interest you pay on that loan can be off-set against the profit generated by that investment property.

Can you raise money on property A to off-set against a profit made on property B? If that loan was raised to enable you to purchase a business asset (i.e. the investment property) I reckon you can (rules changed in 1995 to allow this).

If you raise £250k on property A to purchase property B for £150k how much can you off-set? I suspect (although I don't really know!!) that you can only claim for the interest on the £150k - i.e. the portion that was raised for business purposes.

How's that for a long-winded way of saying "I don't really know, but I'll tell you anyway!!"

[plym77]

Hi

Firstly, my apologies to the forum for leaving you in peace for a while. The last 6 months has been very busy for me and continues to be! I will try and pop my head in every so often and help out with your tax and accounts queries.

Hi Andrei

My name is Sherena and I am a qualified Chartered Tax Adviser and Tax Manager for a National firm of accountants. I am also a landlord.

With regard to your tax query, I can comment as follows:

It is perfectly fine to draw a second mortgage from your own home and claim the tax relief on the interest paid on this second mortgage (up to the value of the BTL). It is adviseable however that you have some form of documentation linking the mortgage to the BTL, as simple as naming 'purchase of buy to let property' in your loan documents. This would assist you in the event of an enquiry by the tax office.

I trust this assists you. If you have any further queries, please feel free to post or email.

Regards

Sherena