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Perhaps I am late yo the party on this thinking:

(I’m not looking to sell my portfolio, it will get passed on to the kids)

i take out a two year mortgage. During that period hopefully the house prices go up. Let’s call it 5%. Assuming similar deals are available remortgaging in 2 years time will enable me to release 75% if that 5% growth. Meaning I have taken out 4.25% over two years (2.125% pa) TAX FREE

Of course I know I will be paying interest on that and eventually there might be CGT  or inheritance tax on the growth but on a £1,000,000 portfolio, that would generate tax free income of £21,250 per annum on top of my rental income. 

That sounds like it will supercharge my pension .

What have I overlooked? I’m surprised this benefit isn’t pushed harder .

 

 

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I don't know the answer but have been wondering the same thing, though sadly I don't have a £1M portfolio. My guess is that you're analysis is correct, but interested to see what answers others might come up with.

I'm also curious about the possibility of getting into a sticky situation where the amount of CGT you owe might even make it impossible to sell. For example, if you've seen big price growth, remortgaged  and then there's a dip in prices, you might be left with more capital gains tax due than you have equity left. You could potentially end up in a situation where you don't have enough equity to get an affordable mortgage, and can't sell because of the CGT! Therefore I think one needs to keep a close eye on the impending CGT and maybe inheritance tax when considering remortaging where there has been large capital growth. I wonder if anyone has experience of this situation?

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Hi Richard,

You have answered your own question..let me explain..

On 2/19/2020 at 6:32 PM, richardhughes said:

During that period hopefully the house prices go up.

So you gain when prices you up. Yipee!

On 2/19/2020 at 6:32 PM, richardhughes said:

That sounds like it will supercharge my pension .

Ok..so your gains are going to pay for your lifestyle, not your ever increasing debt.

On 2/19/2020 at 6:32 PM, richardhughes said:

What have I overlooked? I’m surprised this benefit isn’t pushed harder .

Put simply, when the market is against you and when prices drop, you may not be able to refinance and draw out extra cash.

Your new lifestyle suffers due to a reduced pension top up.

When your mortgage term ends, and if the market has dropped, and you have not paid down your debt (cos it's been topping up your pension), what is your stragergy for paying back the mortgage?

Even if you can sell, will you have the cash spare to pay your CGT?

On 2/19/2020 at 6:32 PM, richardhughes said:

 

(I’m not looking to sell my portfolio, it will get passed on to the kids)

Will it?? You mean you hope it will.

Unless you intend to repay your increasing debt with rent payments and continue to do so even when the sales market is against you.

Please base your investment strategy on an actual strategy, if you intend to pass on your legacy to your children, then take the steps nessesary to make this happen.

Making short term tax free gains could ruin your long term goals.

Hope this helps 

Conrad


Conrad Paton

+44 7957 959851

conradpaton@yahoo.co.uk

https://www.linkedin.com/in/conrad-paton-424446110

 

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Thanks Conrad, So if I interpret your comments correctly, yes I could supercharge my income in this way and that would be Ok if prices keep going up and lending criteria stay the same BUT we cant rely on the future being the same as the present and as Tuk points out there is a risk....Suddenly if I can't remortgage and if Ive not left enough equity in the property to cover the expences of selling including CGT, I would get into an uncomfortable position.

Your strategy seems to be based upon paying down the debt and yet others advocate the advantages of leverage. By keeping leverage as high as safely possible you would maximise your ROI?

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Hi Again,

In a nutshell ...yes.

5 hours ago, richardhughes said:

 

Your strategy seems to be based upon paying down the debt and yet others advocate the advantages of leverage. By keeping leverage as high as safely possible you would maximise your ROI?

As I mentioned on this forum before my current strategy is buy BMV, rent, evict, develop, sell AMV, I do not hold onto long term investment properties (5 + years) at the moment.

I have in the past.

I understand the advantages of leverage, I use finance in my stragegy, but with a clear exit.

I am just trying to answer your question.

Your idea of continuing to extract equity out of your portfolio is fine (subject to capital increase and lending criteria) but the stragegy itself is based upon hope.

Hope that the market increases in value, hope that lending is available.

Which is itself fine, but it comes with risks.

I'm just trying to make you understand some of those risks.

In my opinion....all the time you have not sold a property for profit, nor collected rent on an unencumbered property, you have haven't made any money from your investments.

Unless you hold more in rental income than you owe obvs.

Some people believe that they can quit their jobs, and live off their rental investments, just paying the minimum required on interest only mortgages. Hoping all will be well when the mortgage term expires. It's a popular belief, but one that is fundamentally based upon hope.

I prefer to deal in tangible figures and clear exits. I've never made a loss and some of my ROIs are in triple figures. But then I'm incredibly hands on and property is pretty much full time for me.

There is nothing wrong with maximising your ROI with leverage, but with increased gains comes increased risk.

Hope this helps a bit 

Conrad

 


Conrad Paton

+44 7957 959851

conradpaton@yahoo.co.uk

https://www.linkedin.com/in/conrad-paton-424446110

 

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Conrad explains this really well and I totally agree with his stance...a constant remortgaging 'strategy' that simply releases more and more debt is fundamentally flawed IMHO. These podcasts & transcripts might help pad that out a bit more: https://www.thepropertyvoice.net/soundbite-refinancing-risks/ & https://www.thepropertyvoice.net/optimum-tax-free-cash-property-investment-strategys/

Sorry to poo-poo the idea but it is very, very risky and having recently read The Black Swan, I dare say any number of unforeseen events could get added to the list of negatives as well.

Nice idea but flawed in my personal opinion.

Best

Richard


Richard W J Brown a.k.a. The Property Voice

Property Investment Strategist

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I was wondering something very similar Richard so I'm glad you asked the question. I was intending to do something very similar in terms of constantly refinancing, perhaps not to the max 75% LTV everytime, but a constant draw every 2 years but the points Conrad raised has made me re-think, perhaps have a mixture of interest only and repayment in the portfolio, or perhaps just keep the debt static and minimise the interest rate every two years by having an increasing LTV ...who knows, back to the drawing board for me.

 

Great discussion though, I hadn't thought about a lot of the points raised here.

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