Remortgaging a BTL house bought using own home equity

[shivtax]

Hi, Ive had a look at quite a few of the mailings without seeing anything that may help me so here goes!
I have a buy-to-let house which was bought fully using a remortgage facility, by taking equity out of my own home. Everything is above board, the bank know what the loan was for and we claim interest relief on the rental income etc. Now comes the complicated bit.. well err, to me anyway! I would like to remortgage this house to buy another BTL but Im not sure if this is possible because I would not be redeeming the original loan. It feels like I would end up with two mortgages on one property, and it wouldnt be very transparent for tax. Does this make sense? I would really welcome anyones thoughts on this please!
Many thanks.
Siobhan.

[Incredulum]

Your post is a bit confusing, but I think you say that:

1. You own a home, 'A' which is worth, say £200k but has a mortgage of 50k on it.
2. You buy a BTL house, 'B' for 100k. This is funded by drawing down 100k of additional mortgage on A.
3. You then buy another BTL house, 'C' for 75k. This is funded by borrowing 75k against house B.

You therefore have two rental properties and two associated mortgages. Perfect. (Obviously the interest on the 50k of outstanding mortgage on your home isn't tax deductible.)

If I have misunderstood, please let me know.

[steve234]

Hi

I think there are two aspects you are asking about here 1) validity of funding two or more BTLs from remortgaging your own home and 2) transparency of claiming interest relief. On (1) generally the bank providing the remortgage is usually less interested in what you are using the money for as long as there is sufficient income and or they have sufficient collateral to cover the loan. e.g. say you have a house valued at £500k, a current residential mortgage of £100k (hence LtV of 20%) which covers £30k from your initial purchase of the home and £70k from your first buy to let. Based on your income and the banks Min LTV, say the bank is willing to lend up to 50% LTV hence you can borrow up to £250k/an additional £150k. It doesn't really matter whether you buy one additional BTL or three additional BTls with the additonal £150k as from a banks perspective the security for the loan is your residential property. I guess the only caveat to this being to what extent the income from the BTLs is expected to cover the remortage repayments-some banks do not take this into consideration and only base it on your pay.

On (2) reclaiming intrest relief shouldn't be a problem, as the purpose of the loan for the BTL can obviously be traced to the remortgage on your own home. The key word here is the "purpose" of the remortgage. You are right about transparency, you will have to request a interest certificate from your lender as usual but in this case as it will cover more than one BTL so you will have to allocate the interest relief between the BTLs correctly which is admittedly less transparent but as long as you do it fairly it should be ok. However I assume you have already encountered this anyway as unless your home residence was mortgage free in the first place, you could only have claimed the interest relief on the portion that was related to your first BTL and not the portion related to your home residence. If you talk to the lender they may have the ability to split the remortgage into buckets so you can gain the additional transparency. I hope that makes sense.

[Incredulum]

you will have to request a interest certificate from your lender as usual but in this case as it will cover more than one BTL so you will have to allocate the interest relief between the BTLs correctly which is admittedly less transparent but as long as you do it fairly it should be ok.

Why will the interest have to be allocated between the BTLs correctly?

[steve234]

I was just making the same point as yourself i.e. only the interest on the loan for the BTLs is deductible with the interest portion on the outstanding mortgage on the residential your not being tax deductible.

[shivtax]

Sorry, I forgot to add that I do not claim interest relief from the residential mortgage, only from the clearly defined extra laon for the BTL. Thanks for checking though!
Siobhan.

[shivtax]

Many thanks for thinking in detail about this for me Incredulum and Steve234. I was going to delete the post because I didn't think it was viable but it sounds like it may have legs from what you have said. Let me state my situation is the step by step way as you have done above.

House A, our own home, is valued at 320k, 40k residential mortgage outstanding, and 190k equity taken out to purchase BTL house B two years ago. This takes me up to a reasonable LTV of 60%, and I dont want to take any more equity out of my own home at this point.

House B was renovated and is rented out, and is realistically now worth around 230k. I would like to remortgage this house on a BTL basis to buy another BTL. However, in order to do this, wouldn't I have to redeem the 190k loan? If I didn't, Im worried that HMRC would say that I have now two mortgages on Property B, the way I would have arranged it, and I can't claim tax relief on both. I would also have to declare on the new mortgage application (I think) that there is a loan still associated with it. If I say its a loan on my own home then this would contradict its use and may cause HMRC problems. Or is it just the case that it doesn't actually matter how I raise the funds as long as it can be clearly shown that I have used it to buy property C? I hope this makes sense to you now.

Many thanks again.
Siobhan.

[steve234]

hi shivtax, I think i got it.

Firstly I am not sure why you prefer not to take out more equity in your own home? Either way you have a loan obligation the only difference is the underlying security. Secondly the rate on your residential remortgage would be much better than the rate you would get from mortgaging property B as a BTL. Thirdly in the current environment, the rates on residential mortgages can be very good, so assuming the a new residential mortgage rate is better than your existing deal, then the funding overall of all properties would be better. personally from what i undertsand of your situation I would take additional equity.

As regards the scenario you outline (whether I agree with the rationale or not)
- you would not have to redeem the original 190 loan on your home, you would just mortgage property B for the amount of deposit you need for C
- you would not have two mortgages on property B...property B is funded by the residential mortgage on A and property C would be funded by the mortgage on property B...HMRC aren't ineterested in how you fund it as long as the purpose for the loan can be shown to be clearly for the purchase of C...

Essentially what you are doing is a smaller version of what people did in the 80's/90s en masse...getting a BTL, when it went up they mortgaged up the BTL to buy another, and did it again and again. OK assuming everything goes up forever as we have seen is not always the case.

Simply..the mortgage company gives a loan 1) based on your ability to pay the repayments 2) ensuring they gain sufficient security in the asset to get back their capital if you can't pay 3) the asset/property doesn't have any other loans against it already...generally they are less interested in what you use the proceeds for. eg you can mortgage B and buy yourself a car or send a gift to me for all they care.

btw you can always call the HMRC if you are still concerned...they are always happy to give advice, albeit you when you finally get through

[shivtax]

Yes, I agree with you Steve regarding the additional home loan, but above 60% LTV the rates with my existing lender are not great, and I wouldn't be able to lend more than 10% which isn't enough for a deposit really. There are some othe reasons as well which stop this route forward; Im looking to sell my main home in ~2yrs time to buy a business, putting all the "BTL" loans onto proper BTL mortgage basis before I do it, to allow me to get the equity out.

One point I must clarify is I would like to raise the whole amount from property B, rather than it just being a deposit, required to purchase property C, at around 60-70% of the property B value. This would mean that I would only need to pay for one (re)mortgage to buy property C. Maybe this is why this why I dont think it will work as there would be no mortgage as such taken out in the name of property C?
Best regards
Siobhan.

[steve234]

ok that makes sense, however I reiterate it's not a problem ..you don't need a mortgage in the name of the property to get the relief...just be able to demonstrate, if required/asked by HMRC that the purpose of the loan from remortgaging B was to buy C.