Remortgaging to interest only while releasing equity for investment

[Christopher Cox]

Hi all,

 

So have have been listening to TPP since joining this forum, currently up to TPP043 since late May, so averaging around 10 per week

 

Since listening, I have had a full change of mindset around my financial life (with Rob and Rob with added assistance of Pete Matthew - meaningful money), I think you very much for this! Working off a clear monthly budget and paying myself first!

 

I currently have a large amount of money locked away in my main residential repayment mortgage and my property in the last 2 years has increased in value by around 10%, I'm looking to take some money out when I remortgage and switch to an interest only mortgage at the same time, with a view to purchasing properties over the next few years that will fully cover the cost of our main residential mortgage (that's what I think is one of my first SMART goals.

 

Later possibly doing "A Rob Dix" and moving out of my residential owned property, turning that into a buy-to-let and moving around via rental properties myself while hitting some more of my life goals.

 

I'm interested to hear if others have gone this same route and your thoughts on this.

 

 

[Kylie Ackers]

 Hi Chris (correct me if it should be Christopher, but us aussies always like to shorten names),

 

Personally, I'd say yes, yes, do it  

My rational brain however would say, it depends on your goals and your attitude to risk.  I do like your SMART goal, not one that often pops up - are you just talking about covering the interest-only payment, or also the repayment part?

 

I have spent the last 5+ years renovating my private residences so that finally I could release the equity to start on my BTL portfolio.

My most recent property allowed me to take a very large chunk which I am now using to build my initial portfolio.

I have a part repayment (25%), part interest (75%) offset mortgage. 

Remortgaging to this product allowed me to extract over £100k at the small cost of an extra £80 per month on mortgage repayments, and I get to expense the equity to my business, bonus!  (side note:  I love my mortgage broker for finding such an awesome product for a residential mortgage)

 

While this all sounds roses, you do have to think about your exit strategy - how will you repay the balance when the mortgage term runs out?  25 years seems like a long time, but it's not, and it's clever to think about the end game now.

Do you have other income to cover this amount ... or some other grand plan to make your millions in the interim?

 

That's my 2 cents worth ...looking forward to other contributions (I love this subject!).

[Donald Kendall]

Kylie do you mind if I ask for more details of your mortgage? I tried to get onto an offset but couldn't find one for properties with a value over 300k at my required LTV. I don't know why this would be a problem for lenders, you would think it would be less risky for them if I were to constantly overpay every month and occasionally take a big chunk out, bit like a giant credit card. Instead I'm going to pay in the minimum each month.

 

Chris if you're after the location/ job independent lifestyle that sounds about bang on. I have a similar vision: I aim to rent out my current residence once I've refurbed it and go down the mobile/ rental route, it can make more financial sense depending on your circumstances and also gives you the chance to see more of the world if that's your thing. I'm not giving up the day job for a while and I will plow all cashflow from BTL properties into deposits for new purchases and grow the asset base as large as possible, but it would be great to be in a position where I'm not forced to work to cover the mortgage and expenses - I could take a bit of time out if I so wished and use that income to cover my residential mortgage (I'll likely keep it on a principal repayment scheme).

 

My thoughts on the exit strategy: I'm not counting on having an alternative income at mortgage end (altho I'm working on it!) so I will either sell a property or 2 to pay off mortgage balances, or extend the mortgage and pass onto the next generation. Rob B put up a great presentation on property strategy in the products section, it's well worth a look to give you an idea of what's possible.

 

Best of luck!

[Christopher Cox]

Thanks for your feedback Kylie and Donald.

 

Good to hear from you and glad that my idea doesn't sound t0o bad, my wife is now getting a little excited at the prospect of reaching our goals at some point before we are 60 and wrinkly

 

I will look at the presentation you mentioned Donald, but I'm still catching up on TPP podcasts, 17 to go, so will not be long. So I'm not sure how to answer your question yet Kylie, but its a good point and something I should try to figure out. I thought that when remortgaging I would be able to just do 25 years each time so never reach the end of the term, but maybe a naivety of mine, so it is something I'm hoping to learn from listening to the remaining podcasts and the resources on this forum, if I can't find the answer I'll ask in this forum again, but don't want to ask if its already been queried. Also at present i was thinking of maybe not paying off my mortgage for my house, as I would have turned that into a cash cow by then and travelling around and giving back to the community buy renting someone else's property

 

I look forward to many more reply's maybe someone is close to having finical freedom already? Would be not to hear your story.

 

Happy Investing Everyone!

 

p.s. Chris will do just fine Kylie only my mother calls me that when i get told off

[Kylie Ackers]

Sure Donald, it's with Santander.

It's 75% LTV, and my property is well over £300k.

 

I think that the product is only available via an intermediary, so you might need to find yourself a good mortgage broker if you don't already have one.

 

Looking on their site they still have flexible offset mortgages.

Not sure how my broker managed to get 75% of the loan on an interest only basis as that isn't mentioned on the sight - that's the power of using a broker!!

[Adrian Cormican]

Kyle

A question if I may on the above where you mention that you expense the equity to your business. What is it that you are referring too, I have investment properties and my own business. Would you be able to expand as it sounds really interesting and something I am not aware of!

Thanks

Adrian

[Adrian Cormican]

Sorry just noticed it is Kylie and not Kyle!

[Kylie Ackers]

Hi Adrian,

 

apologies for not being very clear - I wrote the above after a couple of glasses of wine   .

 

What I meant was that if you release equity from your own home, you can include the interest on that equity as an expense to your business for tax purposes.

For example, say you released £100k from your primary residence to use to purchase a couple of BTL properties.  The interest that you pay on that £100k can be claimed as an expense to your property business.

The same is true if you release any equity from a BTL property and re-invest it in your property business.

 

In both cases you do need to show that the released equity was fully used by the property business.

You also need to keep a record of how the expense amount was calculated.

 

This is how I calculate the amount I can expense:

 

   amount of equity used by business  x  interest rate =  yearly amount to expense

                         

 

Using £100k as an example:

 

    £100,000  x 3.19%  = £3190/year  = £265.83/month   (for a part month you'd divide the yearly amount by 365 and then multiply by the number of days)

 

Hope that makes it a little clearer.

[Guest Barry 965]

Interesting Kylie, can the expense be offset with a normal BTL or is it for business use only..?

Thanks

Barry

[Guest Barry 965]

Interesting Kylie, can the expense be offset with a normal BTL or is it for business use only..?

Thanks

Barry

[Christopher Cox]

***Post removed as my reply has now appeared a few comments up***

[Kylie Ackers]

Barry, you said:

 

 

 

can the expense be offset with a normal BTL or is it for business use only

 

I'm not really sure what you mean.

If you release equity (ie. remortgage) a normal BTL property, the entire mortgage payment can be claimed as an expense as long as the money released is used in your property business.

If however you release the equity and buy a car, then you cannot claim the interest on the mortgage as an expense.

 

Does that help?

[Guest Barry 965]

Thanks Kylie, I should have said, unlike many others, I am not registered as a business as I only have the one BTL. So was just wondering if I'm able to offset - against tax - the interest that I currently pay on the £25,000 deposit which I withdrew from my offset mortgage facility,

Thanks

Barry

[Kylie Ackers]

Hi Barry,

 

yes it will still apply.  No matter how you see yourself, business owner, self-employed or limited company, the expense can still be offset against the income.

The important thing is to have the paper trail to show that the money you extracted has been wholly used to purchase the BTL property.

[adam_sturdy_mac_com]

Hi Barry,

Just further to what Kylie says, you put this on your Self Assessment (SA) form if you are just renting out the BTL yourself. This is a specific section on the form for each property. Even if you don't have to split the amounts on the SA form it's important to keep the paper trail, including if necessary the specific financial transfers to prove use of funds for the tax man.

In your case it would be all the interest for that 25k.

->Adam

[Christopher Cox]

as this thread appears to have turned into "Ask Kylie" I have an additional query on the process of working out the additional interest charged on your residential property.

 

I currently have a repayment, and will switch to a interest only, how would I go about figuring out the additional interest cost of this change? so that I can enter this in as a cost?

[Kylie Ackers]

"Ask Kylie" ... love it ... but let's keep it to questions related to remortgaging for BTL investment else I won't come across so clever  

 

Chris, before I answer, can you please clarify if is it your existing mortgage that you're changing from remortgage to interest only, or are you re-mortgaging?

[Kylie Ackers]

Sorry, I see you have this in the original post

 

 

       I'm looking to take some money out when I remortgage and switch to an interest only mortgage at the same time

 

 

The equation holds the same:   amount of equity used by business  x  interest rate =  yearly amount to expense

 

Here's an example to help.  

 

Let's say your property was originally purchased for £200k and it had 85% LTV.  This means you initially put in £30k as a deposit and got a mortgage for the remaining £170k.

You've been making lots of repayments, and now your repayable loan is down to £150k.

The market has moved and now the property is worth £230k.

 

You find an interest-only mortgage product again at 85% with an interest rate of say 4%.

You can get a mortgage for £230k * 85% = £195 500.  You pay off your old mortgage (£150k) and now have £45,500 that you can use for a BTL purchase.

 

This £45,500 is effectively a loan to your property business.  You can expense the interest payments on this part of the mortgage.

 

expense = £45,500 * 4% = £1820 per year

 

Your numbers will obviously be quite different, but the same calculation should hold true.

 

Feel free to PM me if you'd like me to help with your specifics.

[Kylie Ackers]

And this one Chris:

 

 

      I thought that when remortgaging I would be able to just do 25 years each time so never reach the end of the term,

 

That's a valid plan, but there is an age limit on being able to take out a 25 year mortgage when it's your residence.

When applying for a mortgage they will only allow the number of years until you reach 65 (or what ever the defined retirement age is), some lenders stretch to 70.

Based on the current retirement age that means you could take out your last 25 year mortgage when you are around 40.

This may change of course, but I wouldn't bank on it.

 

The criteria are different for BTL mortgages where there are a lot of products available up until you reach the ages of 60-70.

[Christopher Cox]

Sorry, I see you have this in the original post

 

 

       I'm looking to take some money out when I remortgage and switch to an interest only mortgage at the same time

 

 

The equation holds the same:   amount of equity used by business  x  interest rate =  yearly amount to expense

 

 

 

Fab understood. Thanks for clearing that up

[Christopher Cox]

And this one Chris:

 

 

      I thought that when remortgaging I would be able to just do 25 years each time so never reach the end of the term,

 

That's a valid plan, but there is an age limit on being able to take out a 25 year mortgage when it's your residence.

When applying for a mortgage they will only allow the number of years until you reach 65 (or what ever the defined retirement age is), some lenders stretch to 70.

Based on the current retirement age that means you could take out your last 25 year mortgage when you are around 40.

This may change of course, but I wouldn't bank on it.

 

The criteria are different for BTL mortgages where there are a lot of products available up until you reach the ages of 60-70.

 

Thats great, so the SMART goal is to... around that time, not actually have a "HOME" as such, so no issue with having a 25year interest only personal mortgage, we will be travelling, so avoiding that expense.

[Andy Norman]

Hi all,

 

Since listening, I have had a full change of mindset around my financial life (with Rob and Rob with added assistance of Pete Matthew - meaningful money), I think you very much for this! Working off a clear monthly budget and paying myself first!

 

I currently have a large amount of money locked away in my main residential repayment mortgage and my property in the last 2 years has increased in value by around 10%, I'm looking to take some money out when I remortgage and switch to an interest only mortgage at the same time, with a view to purchasing properties over the next few years that will fully cover the cost of our main residential mortgage (that's what I think is one of my first SMART goals.

I'm interested to hear if others have gone this same route and your thoughts on this.

Hi Chris

It's good to know that you're catching up on TPP episodes and that you're also enjoying Pete Matthew's http://meaningfulmoney.tv/mmpodcast/, I'm a big fan of his work. You should definitely take time to check out RMP's Ultimate Property Strategy course http://thepropertyhub.net/products/strategy-course/ or give Rob B a call at RMP.

Kylie's is providing us all with some great information and advice here and I think "Ask Kylie" should have its own dedicated Forum. I highly recommend her Progress Journal (for Hub Plus members) and her blog http://diytopropertyinvestor.co.uk

My strategy isn't quite as adventurous as yours (or Kylie's) and I'm definitely more of a hands off investor but I also have significant equity in my residential property. We're currently looking to move home, change our current property to BTL and purchase another BTL. We'll use the equity to finance the deposit on the new home and new BTL. This will be my 5th BTL and that is all my strategy requires (see the course above!). Once all this is in place my plan is:

Home

~ Repayment mortgage

BTLs

~ Interest only mortgages

~ Use 'excess' rental income to overpay the lowest mortgage, until clear, them move on to the next one. See http://meaningfulmoney.tv/2012/12/30/mmp004-five-steps-to-get-out-of-debt/

I appreciate this goes against the idea that you should let interest rates erode the 'good' mortgage debt but I'm not looking to give up my day job for a few years yet and would rather help speed that interest rate erosion clear the debt.

[Christopher Cox]

ok so a little update on this post.

 

My financial advisor has looked into switching to an interest only mortgage for my home, but apparently its almost impossible to do this at the moment unless I have something in the region of 50% Equity to leave in the property and earn around £100k per annum.

 

I have been making overpayments over the last two years to the total of around £55k, but now can't get my hands on it, unless I remortgage (i still have 3 years left on my fixed term and will incur a fee of around £5k to get out, plus fees to get into a new mortgage)

 

So we have either..... 

 

plan b....change my current 3 bed house, near primary school, secondary school, train station, motorway, town centre into a rental, ROI after taking into account property price increase (free money ) is 11.22% around £550 profit each month, now the job is to find another property for us to move to with the left over equity for around £650 repayment mortgage (about 1/3 the price of my current house)...do up then rent again.

 

or plan c....save for the next 17months for the funds

 

I think we will unfortunately in the short term go with plan C, buy a place around January 2016, then once we remortgage in April 2017, get our second. (plan b means moving out of the family home which is a bitter pill to swallow at this point)

Edited July 29, 2014 by christopher cox

[Christopher Cox]

update!

 

The Wife has agreed to Plan B. So between now and April we are going to fully renovate our house increase value/get ready for tenants and move to a smaller property with the profits.

 

I'm probably looking at families with kids, as there is both a primary school and secondary school within a 2 minute walk (around 500M down the road)

 

Would April be a good time to get this type of property on the letting marked or should we do it earlier. And should we market it once we have found a place to move to, or after we have completed on that purchase?