Assigning a mortgage on main house to buy to let property

[Aliwilly]

This is a variation to a number of questions already posted.

I currently have a mortgage of around £120k on my main residence with around 15 years to run with an interest charge of base rate plus 0.5% subject to a minimum rate of 3%. The mortgage and house is jointly owned with my partner. We can change this to interest only and extend the term on this for around £100 fees.

We are considering buying a buy to let property for around £120k.

We could pay off the existing mortgage and then take out a new buy to let mortgage. However, this would incur fees and would be at a higher rate of interest than our current mortage. We can arrive at the same place in a more economical way by changing my existing loan to interest only and extending the term to 23 years and then claiming the interest on my existing loan as a deductible expense against the rental income.

Would I be permitted to do this? I understand that I need to demonstrate that the purpose of the loan is for the buy to let. Do I need to formalise the arrangement and if so - how would I go about this?

[King_Maker]

I assume you have ~ £120k in cash, which you had intended to use for buying the BTL property?

I don't think there is a way of retaining your current "cheap" mortgage and obtaining Income Tax relief against rental income.

[robbob]

Hello Aliwilly

You have the option of paying down the old mortgage and taking a new non BTL mortgage on your main residence which would presumably be on broadly similar terms to what you have now, providing the funds advanced on the new mortgage are used to invest in the BTL property then the interest will on your mortgage will be deductable for tax purposes.

[section 44]

Is your existing mortgage sufficiently flexible that you can make overpayments without any penalty and withdraw overpayments on demand?

If your existing mortgage is sufficiently flexible then you could over pay it and then withdraw the overpayments and use those funds to purchase the BTL/repay a new mortgage on the BTL. This may give you an argument that the interest on the exitsing mortgage would be deductible against rental income.

Practically a lot of mortgages allow overpayments to be withdrawn although, notably, HSBC (for example) don't.

[robbob]

If your existing mortgage is sufficiently flexible then you could over pay it and then withdraw the overpayments and use those funds to purchase the BTL/repay a new mortgage on the BTL. This may give you an argument that the interest on the exitsing mortgage would be deductible against rental income.

Now why didn't i think of that cunning plan.

HMRC specifically advise via an example that a further advance on a previous loan such as section44 suggests will be ok (providing the further advance is used for business purposes) - obviously an adjustment for the non business element (previous o/s balance) will be needed.

<i> Using an offset account Mr and Mrs L borrowed £100,000 for the purchase of their own home. They then borrowed a further £250,000 to buy a rental property. Both their salaries are paid into the account together with rents of £2,000 a month. They pay all of their private expenses from the account. A reasonable apportionment of the interest charge would have to be made between the private and business purposes. </i>
http://www.hmrc.gov.uk/manuals/bimmanual/BIM45695.htm

[maths]

If a further advance under the existing mortgage is obtained and those funds are used to purchase a BtL I see no reason why the interest element attributable to that additional advance should not be tax deductible (it has been wholly and exclusively incurred).

The aggregate interest payments are readily split into the private element (ie interest attributable to the borrowing for the home) and that attributable to the funds used to buy the BtL.

[King_Maker]

Is your existing mortgage sufficiently flexible that you can make overpayments without any penalty and withdraw overpayments on demand?

If your existing mortgage is sufficiently flexible then you could over pay it and then withdraw the overpayments and use those funds to purchase the BTL/repay a new mortgage on the BTL. This may give you an argument that the interest on the exitsing mortgage would be deductible against rental income.

Practically a lot of mortgages allow overpayments to be withdrawn although, notably, HSBC (for example) don't.

Yes, that would work if the lender agrees.

Quite a few "chequebook" mortgages used to be available - not sure if they still exist in the current financial climate.

[Aliwilly]

Thank-you to everyone that replied. Yes I do have £120k in cash. My take-away is that I will not be able to offset the loan interest on the existing loan unless I actually pay off and then withdraw the amount. I have had a look at the Skipton website and it does not mention flexibility to withdraw after overpayment. I will call them this week to make absolutely sure.

It seems a bit artificial paying off £120k and then immediately withdrawing £120k. Could I not argue that informally assigning the loan purpose to buy to let has the same effect? I guess the problem is demonstrating that the £120k loan is for the buy to let. Could I do this by commercially justifying the informal assigning by maybe getting quotes on a BTL mortgage and then comparing on a commercial basis the BTL mortgage with commercial assignment, Something along the lines of:

Informal Assignment
Rental Income p.a. £5,000
Mortage Interest (informal assignment) £3,600
Net Income (informal assignment) £1,400

compared to

BTL Mortage
Rental Income p.a. £5,000
Mortgage Interest (at say 4%) £4,800
Arrangement Fees (say) £1,000
Net Loss (BTL mortgage) (£800)

The Inland revenue would actually earn more tax under the informal assignment!!

[maths]

My take-away is that I will not be able to offset the loan interest on the existing loan unless I actually pay off and then withdraw the amount.

Not in my opinion; see my earlier posting.

[maths]

Correction; have just re-read your initial posting. I thought (incorrectly) that you were borrowing additional funds under your existing mortgage.