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disenfranchised

Borrow against London

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Just a thought that occurred to me...

Say you owned a London property outright or low LTV that is currently 'worth' a stupid amount - lets say £600k

If you secured  £200-300k MEW against it IO and bought a property outright somewhere fractionally less mental with a sound employment base - lets say south Midlands - and then rented it out...

-no S24 as no BTL mortgage?

-can make repayments on capital from rental yield

-hedge against London super bubble

 

Serious question... why is this a bad idea?

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Hasn't S24 got other stuff in it other than tax relief on interest, namely tax on capital gains? Yeah you might make 4-5% with no voids an all that but its all quite a performance innit?

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5 hours ago, disenfranchised said:

Just a thought that occurred to me...

Say you owned a London property outright or low LTV that is currently 'worth' a stupid amount - lets say £600k

If you secured  £200-300k MEW against it IO and bought a property outright somewhere fractionally less mental with a sound employment base - lets say south Midlands - and then rented it out...

-no S24 as no BTL mortgage?

-can make repayments on capital from rental yield

-hedge against London super bubble

 

Serious question... why is this a bad idea?

You'll  be taxed on the rental income, reducing a minuscule yield to sod all.

The 'genius' with BTL IO was to crank up the debt as much as poss. and get the rent and IR payments cancelling themselves out,

No debt o nthe BTL then the rental income will be taxed at your top IR rate.

Its not a hedge as youve just double your exposure to  property.

 

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6 hours ago, disenfranchised said:

Just a thought that occurred to me...

Say you owned a London property outright or low LTV that is currently 'worth' a stupid amount - lets say £600k

If you secured  £200-300k MEW against it IO and bought a property outright somewhere fractionally less mental with a sound employment base - lets say south Midlands - and then rented it out...

-no S24 as no BTL mortgage?

-can make repayments on capital from rental yield

-hedge against London super bubble

 

Serious question... why is this a bad idea?

You could make exactly the same argument but insert any other  income producing asset class instead of property, say shares in a utility like a water company. In fact, the diversification benefits are higher as you have more than one asset class. 

But in the numbers, on the cost side you pay the SDLT for starters. That's nearly £10,000 of value destruction straight away. 

Then there is the cost of the mortgage. Let's pencil in 3%.

This is offset by income from the property - let's say 5%. But there will be costs and vacancies. Let's say this works out at 4.5% of taxable income.

If we then assume a 40% tax rate, that leaves you with 2.7% after tax. This will not be enough to pay the mortgage on the primary property. 

If you are in the 20% tax band it makes more sense.

Other than that, it is just a bet that rents and capital values rise.

 

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7 hours ago, disenfranchised said:

Say you owned a London property outright or low LTV that is currently 'worth' a stupid amount - lets say £600kIf you secured  £200-300k MEW against it IO and bought a property outright somewhere fractionally less mental with a sound employment base - lets say south Midlands

-hedge against London super bubble

Serious question... why is this a bad idea?

The reason this is a terrible hedge is that London house prices and South Midlands house prices are highly correlated. Usually they both go up or down in price in the same direction at the same time. Not only is it a bad hedge, you are proposing to take on leverage in order to make the trade so the potential losses to your original stake are amplified.

And as others have pointed out this is not really tax efficient because you will have to pay income tax on your rental income whereas the imputed rent on your main residence is tax free.

Edited by Dorkins

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26 minutes ago, Ah-so said:

You could make exactly the same argument but insert any other  income producing asset class instead of property, say shares in a utility like a water company. In fact, the diversification benefits are higher as you have more than one asset class. 

But in the numbers, on the cost side you pay the SDLT for starters. That's nearly £10,000 of value destruction straight away. 

Then there is the cost of the mortgage. Let's pencil in 3%.

This is offset by income from the property - let's say 5%. But there will be costs and vacancies. Let's say this works out at 4.5% of taxable income.

If we then assume a 40% tax rate, that leaves you with 2.7% after tax. This will not be enough to pay the mortgage on the primary property. 

If you are in the 20% tax band it makes more sense.

Other than that, it is just a bet that rents and capital values rise.

 

But then you'd not get the second mortgage.

And the rental income might push you into higher rate tax.

As well as the S24 changes, you have to realiase that by the people most people  have paid off a mortgage then they are too old to get another one.

 

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12 minutes ago, spyguy said:

But then you'd not get the second mortgage.

And the rental income might push you into higher rate tax.

As well as the S24 changes, you have to realiase that by the people most people  have paid off a mortgage then they are too old to get another one.

 

Actually I could take £200,000 out of my house and have a modest mortgage thanks to the God of London HPI and mortgage over-payments that has left us stuck in a box-like house. I can't trade up but I could afford a second property! 

The marginal tax question is relevant and will depend upon the individual's income. But the theoretical property is unlikely to generate taxable income above £15,000, so as long as your income is below £30,000, it is unlikely to push anyone into the higher tax band. 

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10 minutes ago, Ah-so said:

Actually I could take £200,000 out of my house and have a modest mortgage thanks to the God of London HPI and mortgage over-payments that has left us stuck in a box-like house. I can't trade up but I could afford a second property! 

The marginal tax question is relevant and will depend upon the individual's income. But the theoretical property is unlikely to generate taxable income above £15,000, so as long as your income is below £30,000, it is unlikely to push anyone into the higher tax band. 

OP said London. Average London salary is ~28K.

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8 hours ago, disenfranchised said:

Just a thought that occurred to me...

Say you owned a London property outright or low LTV that is currently 'worth' a stupid amount - lets say £600k

If you secured  £200-300k MEW against it IO and bought a property outright somewhere fractionally less mental with a sound employment base - lets say south Midlands - and then rented it out...

-no S24 as no BTL mortgage?

-can make repayments on capital from rental yield

-hedge against London super bubble

 

Serious question... why is this a bad idea?

Or you could just STR.

 

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36 minutes ago, spyguy said:

But then you'd not get the second mortgage.

And the rental income might push you into higher rate tax.

As well as the S24 changes, you have to realiase that by the people most people  have paid off a mortgage then they are too old to get another one.

 

BTL dont pay tax on a 9-5 job do they? They play golf.

So its unlikely they pay tax all unless they have a "portfolio"

As for the mortgage, they secure the mortgage against the BTL income, a job is not required.

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1 minute ago, GreenDevil said:

BTL dont pay tax on a 9-5 job do they? They play golf.

So its unlikely they pay tax all unless they have a "portfolio"

As for the mortgage, they secure the mortgage against the BTL income, a job is not required.

From the OP:

'Say you owned a London property outright or low LTV that is currently 'worth' a stupid amount - lets say £600k

If you secured  £200-300k MEW against it IO and bought a property outright somewhere fractionally less mental with a sound employment base - lets say south Midlands - and then rented it out...'

Beside, even if they did not have a job, all the BTLers assure us they work hard on their portfolio esp. making a sob story to the press.

Unless they are trying to impress their mates, in which case its 1h/week.

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4 minutes ago, spyguy said:

Beside, even if they did not have a job, all the BTLers assure us they work hard on their portfolio esp. making a sob story to the press.

Unless they are trying to impress their mates, in which case its 1h/week.

Yep, they are certainly the most hard working entrepreneurial intelligent people amongst us, cough cough

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7 hours ago, disenfranchised said:

Just a thought that occurred to me...

Say you owned a London property outright or low LTV that is currently 'worth' a stupid amount - lets say £600k

If you secured  £200-300k MEW against it IO and bought a property outright somewhere fractionally less mental with a sound employment base - lets say south Midlands - and then rented it out...

-no S24 as no BTL mortgage?

-can make repayments on capital from rental yield

-hedge against London super bubble

 

Serious question... why is this a bad idea?

 

Many people do raise funds on their main home to buy a second or investment property.

Using your example of a £600,000 property with no mortgage. An owner can remortgage to £300,000 at a rate of say 2.39% fixed for 10 years with no fees

That will cost them less than £7,200 a year in interest while they could buy two rental properties in the Midlands which would earn them £18,000 per year in rent.

Even using the S24 rules.

 

£18,000 rent

£500 annual void

£1,500 annual upkeep

£16,000 gross taxed at 40% gives £6.4k tax minis 1.4k credit. Leaves £11k

Minus the mortgage of £7200 and the homeowner is left with £3,800 annually after all costs and taxes. Or £38,000 over the 10 year fix.

This £38,00 they can use to pay down the borrowed £300,000 so at the end of the ten years they have a debt of £262,000 remaining. If at that point they sell the properties for 15% more than they purchased (that's still a 10% real term HPC) they would have £45,000 capital gains minus purchase and sale and taxed at 28% would still leave some £28k post taxes

 

So overall you are looking at £38k post tax profit on the rental side and £28k prpfit post tax on the capital gains side (assuming a 10% real term HPC)

So this person would be up £66,000 post tax over the ten year period. 

If there is no house price crash they wipp be up about £94,000

There was also some £10,000 in stamp duty at the front or about £7,000 post selling and 28% cgt removal.

 

So you are looking at £60k-£100k profit after taxes. The higher end if no real HPC and the lower end if a real 10% HPC.

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More likely is that someone with a £600,000 property in London could sell it and move to Birmingham and buy 4 x 2 bed houses for £130,000 each plus about £5k costs and stamp duty. £540,000 total. Spend the other £60,000 as a deposit on your own residential £130k property so only £70k mortgage

 

You would have £31,200 gross rental income and no mortgage on them. After costs your looking at about £25k income minus the usual income taxes you'd have some £22k post tax income.

That is probably enough to retire on for most people especially as your own mortgage will only be about £250 per month.

 

Live out the rest of your days and leave the four properties mortgage free to the kids

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1 hour ago, Dorkins said:

The reason this is a terrible hedge is that London house prices and South Midlands house prices are highly correlated. Usually they both go up or down in price in the same direction at the same time. 

I entirely agree.

However, its useful IMO trying to think like the 'safe as houses' brigade do in order to predict what they might do.

I suspect a £250k semi in Milton Keynes is rather less likely to hit £125k than a £600k flat in zone 2 is likely to hit £300k which is how I suspect they'd see it - rather than "I should STR" or "I should downsize and invest capital in something else" which is how I would feel if sat on inner London property 

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48 minutes ago, RushRoad said:

More likely is that someone with a £600,000 property in London could sell it and move to Birmingham and buy 4 x 2 bed houses for £130,000 each plus about £5k costs and stamp duty. £540,000 total. Spend the other £60,000 as a deposit on your own residential £130k property so only £70k mortgage

 

You would have £31,200 gross rental income and no mortgage on them. After costs your looking at about £25k income minus the usual income taxes you'd have some £22k post tax income.

That is probably enough to retire on for most people especially as your own mortgage will only be about £250 per month.

 

Live out the rest of your days and leave the four properties mortgage free to the kids

I know a few people who live in £600k properties in London.

There is a somewhat low likelihood they would choose to live in a £130k property in Birmingham people farming for £25k a year.

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10 minutes ago, disenfranchised said:

I know a few people who live in £600k properties in London.

There is a somewhat low likelihood they would choose to live in a £130k property in Birmingham people farming for £25k a year.

Balti foe tea. Every night!

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48 minutes ago, disenfranchised said:

However, its useful IMO trying to think like the 'safe as houses' brigade do in order to predict what they might do.

Just to note that there is some suggestive evidence they have generally being doing this for some time. Compared to homeowners who are not landlords, homeowners who are landlords are:

Quote
  • Less likely to own their own home outright and more likely to have a mortgage
  • Far more likely to have a larger, more expensive home
  • Far more likely to have a large (£200k+) mortgage outstanding against their home
  • Far more likely to have an interest-only mortgage
  • More likely to have a mortgage at higher LTV (60%+)
  • Far more likely to have significant equity in their own home (£175k+)

(The list is from the OP on the Understanding Landlords thread, which gives a link to the source, the underlying study was published in June 2013)

Edited by Bland Unsight

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People financing purchases in this way don't show up in the CML's BTL mortgage approval figures (obviously enough, as there is no BTL mortgage, merely some MEW on a previously existing owner-occupier mortgage) and they appear in the transaction figures to be cash buyers.

My guess would be that the numbers of people doing this today are not significant, but it's just a guess.

The difference between the levels of mortgage equity withdrawal (the Bank of England now call it Housing Equity Withdrawal) today compared to Brown's go-go years is stark. However a large flow due to people using low rates to pay down eye-watering boom interest-only mortgages could mask a modest flow of people MEWing out capital to finance Rush Road (The Anecdoctor) style retirement plans.

58f49ecf99f6b_BoEHEW1980-2016Q4.png.14207f5717bbd959ca14f81e4e41e990.png

Edited by Bland Unsight

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15 minutes ago, Bland Unsight said:

My guess would be that the numbers of people doing this today are not significant, but it's just a guess.

The difference between the levels of mortgage equity withdrawal (the Bank of England now call it Housing Equity Withdrawal) today compared to Brown's go-go years is stark. However a large flow due to people using low rates to pay down eye-watering boom interest-only mortgages could mask a modest flow of people MEWing out capital to finance Rush Road (The Anecdoctor) style retirement plans.

Interesting to note that the spike towards the end of the series is from Q3 2015 to Q1 2016.

The SDLT surcharge was announced in November 2015.

Not sure about how the timings would work but it seems reasonable to me to suggest that the Treasury would have been aware of the pick-up in HEW as captured by the Q3 2015 figure before they announced the SDLT surcharge. It's pure speculation but one might suppose that the Treasury were responding to the HEW pick-up. They may have had some survey data confirming that people were HEWing to make BTL investments (with BTL mortgages) - the HEW providing the deposit.

Edited by Bland Unsight

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2 hours ago, RushRoad said:

 

Many people do raise funds on their main home to buy a second or investment property.

Using your example of a £600,000 property with no mortgage. An owner can remortgage to £300,000 at a rate of say 2.39% fixed for 10 years with no fees

That will cost them less than £7,200 a year in interest while they could buy two rental properties in the Midlands which would earn them £18,000 per year in rent.

Even using the S24 rules.

 

£18,000 rent

£500 annual void

£1,500 annual upkeep

£16,000 gross taxed at 40% gives £6.4k tax minis 1.4k credit. Leaves £11k

Minus the mortgage of £7200 and the homeowner is left with £3,800 annually after all costs and taxes. Or £38,000 over the 10 year fix.

This £38,00 they can use to pay down the borrowed £300,000 so at the end of the ten years they have a debt of £262,000 remaining. If at that point they sell the properties for 15% more than they purchased (that's still a 10% real term HPC) they would have £45,000 capital gains minus purchase and sale and taxed at 28% would still leave some £28k post taxes

 

So overall you are looking at £38k post tax profit on the rental side and £28k prpfit post tax on the capital gains side (assuming a 10% real term HPC)

So this person would be up £66,000 post tax over the ten year period. 

If there is no house price crash they wipp be up about £94,000

There was also some £10,000 in stamp duty at the front or about £7,000 post selling and 28% cgt removal.

 

So you are looking at £60k-£100k profit after taxes. The higher end if no real HPC and the lower end if a real 10% HPC.

Who can you get a10 year fix at 2.39% from with no fees? I know rates are nuts at present but I wonder who is offering this rate with no fees. 

Edited by Ah-so

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11 hours ago, disenfranchised said:

Just a thought that occurred to me...

Say you owned a London property outright or low LTV that is currently 'worth' a stupid amount - lets say £600k

If you secured  £200-300k MEW against it IO and bought a property outright somewhere fractionally less mental with a sound employment base - lets say south Midlands - and then rented it out...

-no S24 as no BTL mortgage?

-can make repayments on capital from rental yield

-hedge against London super bubble

 

Serious question... why is this a bad idea?

As @Bland Unsight has already pointed out, it's perfectly possible people are already doing this and have been since 2015. 

58f4ababd504c_ScreenShot2017-04-17at12_48_06.thumb.png.fb8f3371dffe3d700300b991dc078c19.png

Edit - however, it's not as simple as saying 'there's more remortgaging so this must be to do BTL'. We just don't know. Other reasons for the amount of remortgaging are record low rates and also the trend for people to improve rather than move in London because the price of bigger properties is just so crazy. 

Edited by Patient London FTB

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13 minutes ago, Ah-so said:

Who can you get a10 year fix at 2.39% from with no fees? I know rates are nuts at present but I wonder who is offering this rate with no fees. 

 

You can get a 10 year fix at 2.49% with no fees from First Direct if you have a good LTV. Early redemption penalties over the first 3 years.

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