Could I take out a mortgage on my own home to keep my buy-to-let portfolio afloat?
01-23-2017
Ian Doran is considering changing his buy-to-let portfolio Credit: David Rose
Olivia Rudgard
It's a dilemma faced by thousands of buy-to-let landlords: should they sell up and give up, or plug on with their property businesses - even if in future it might make a loss?
The crunchpoint for landlords is the April 6 introduction of new tax rules. These will gradually reduce the ability of investors to offset the cost of mortgage interest against rental income.
In effect, tax will be charged on the money that landlords have to pay to their lender. This will cut profits and push some in to the position where they make monthly losses.
One solution for many is to switch mortgage debt away from their investment properties and on to their homes.
Most buy-to-let landlords are also homeowners. It's difficult to get a buy-to-let mortgage if you don't already have a residential one, and most people buy their own home first.
Rates on residential mortgages tend to be significantly lower than those on buy-to-let mortgages - as much as two percentage points - and are currently very low.
So some landlords are considering taking out residential mortgages against their own homes, and using the money released to pay down their buy-to-let debt.
Ian Doran, 49, owns five student properties in Cambridge, with a combined value of £1.7m. He has outstanding mortgages of £695,000, and pays £4,650 a month in repayments and interest.
He and his wife also own their own home, mortgage-free, near the university town. It's worth about £500,000, and the couple are thinking about taking out a mortgage on it to pay down the cost of the buy-to-let mortgages.
Mr Doran, an IT contractor, pays rates of between 3.99pc and 4.29pc on the mortgages.
These rates are fixed for five years, and three of the five will come up for remortgage in May 2018.
Currently Mr and Mrs Doran deduct their mortgage costs, plus the cost of ground rent, management fees and maintenance, from their rental income, and then split the remainder in two.
From April, they will begin to lose the ability to deduct mortgage interest - and Mr Doran thinks this means both will become higher-rate taxpayers, and their tax bill will then substantially increase.
Watch | Buy-to-let tax changes explained
They are therefore thinking about taking out a mortgage on their home and using it to pay down their buy-to-let mortgages.
This would reduce the monthly cost of the mortgages, which will make them better able to manage the higher tax bill.
There are four key questions every landlord should ask themselves when considering this method of shoring up their buy-to-let portfolio.
Can you remortgage the properties first?
The first port of call should be to try and get cheaper loans on a buy-to-let basis, said David Hollingworth of mortgage broker London & Country.
This may not be possible without paying a penalty until the fixed rates expire, depending on the terms of the loan.
"The landlord should review his buy-to-let mortgages first, even though the rates may be at slight premium. He may be concerned about his rental cover, so a smaller mortgage should make this less of a problem," he said.
Keeping the debt secured against buy-to-let properties removes the risk that you might have to sell your own home, should the business fall into difficulties.
It will also depend on the size of the mortgage you have compared to the value of the property. Many current buy-to-let landlords face being stuck on their existing loans because of tougher regulation.
Some will have mortgages that under current rules, they wouldn't be able to afford. This is because lenders now require landlords to take more rent relative to their mortgage costs than they used to, and measure these costs based on a higher rate.
This may make it more difficult for them to remortgage. So some landlords may be looking to make the size of their mortgages smaller, so that they can afford to remortgage and pay a lower rate.
Even if this is not the case, a smaller mortgage should mean a better rate, as well as less interest to pay overall - a very good thing for landlords concerned about the affordability of their buy-to-let portfolio.
How expensive are the mortgages?
The method of replacing expensive debt with cheap debt is not uncommon, and is frequently done by investors who take out mortgages against their home to add properties to their portfolio.
Residential mortgages are cheaper than buy-to-let ones, and in Mr Doran's case, they are likely to be substantially cheaper.
Were he to take out a 75pc mortgage against his property now, he would pay around 1.25pc, with Leeds Building Society, albeit with fees of £1,500.
This is more than three percentage points cheaper than his current mortgages.
How much can you afford to borrow?
Whether you are able to take out a mortgage on your own home will depend on your personal income, from salary and dividends, not rental income as is the case with a buy-to-let property.
Lenders typically allow you to borrow only four-and-a-half times your income. If you're self-employed, you'll need to show accounts going back several years to prove your income is sustainable.
This is where some landlords, especially those who are close to retirement, might come unstuck as they may have been relying on the buy-to-let income and not earning much salary, making it difficult for them to show that they can afford the residential mortgage.
Will you still be able to offset the debt?
It may not be well known by many, but if the owner-occupier mortgage is taken out and used solely for the purpose of paying down the debt on a buy-to-let, or to buy a new one, the landlord should still be able to offset the interest costs against their rental income - to the extent that that relief persists.
Tina Riches, of accountancy firm Smith & Williamson, said: "The purpose of the loan is the important factor rather than what it is secured on.
"As a consequence, the interest is specifically eligible for relief if it is paid on a loan that is used to repay another eligible loan.
"The lender will need to be happy with the new arrangements and be prepared to offer a lower interest rate than on a traditional buy-to- let mortgage, even though it will be used for the property business."
You would need to show a paper trail demonstrating that the money released from your home had been used to pay down the buy-to-let loan.
But if this is the case, you would be able to claim the new 20pc tax credit on the interest on your mortgage - even if it is taken out against your main home