Residential Morgage versus Buy To Let

[Cybergal]

I'm looking to buy a small studio that I can live in with my boyfriend whilst he finishes saving up to buy a house.  We're hoping to buy the house next summer, but of course it might take longer.  Once we've bought the house, i'd like to be able to keep the studio and rent it out.  So, my dilemma is whether to get a residential mortgage (i own no other properties) with a fixed rate for 5yrs, which I'll be able to afford, but run the risk that in a year or so i'll want to rent the property out and i'll have to ask the bank for permission.  Would I be better off getting a buy-to-let mortgage now instead, before the rates continue to rise, so that I'll have no problem letting it out in the future?

Or are banks usually ok with giving you permission to rent out your residential property without changing you over to a buy-to-let / increasing your interest rate?

I'm also trying to find out whether the tax allowances that you get on the interest payments, building insurances, and letting-agent fees apply regardless of whether the property I'm letting out is held on a residential mortgage or a buy-to-let mortgage.  This might make a difference in the long term.

I'd really like to be able to get the 5yr fixed rate mortgage as I'm really uneasy about the interest rates rising, but I'm really worried about the possibility that the bank will not let me rent it out in a year or two without raising the interest rates and they might be higher by then!

Any advice anyone can give me would really help as I'm new to all this.  Thanks.

 

[Miss Zippy]

You'd need to check with a potential lender what their rules on you letting out your property - I have a flat with a 'residential' mortgage which I rent out with no problems (though of course I had to notify my ledner of this).  The downside of buy-to-let mortgages, as you have have already found out, is that interest rates tends to be higher and a higher deposit is required - typically 15% to 20% of the purchase price. The rent you receive is taxable as if it was earned income, but as you rightly point out, you can offset your mortgage payments, letting agent fees etc against this and this is the case regardless of the type of mortgage you have.

[J3TUN]

Be VERY careful.  If you take out a buy to let mortgage knowing that you will live there yourself you are commiting mortgage fraud and if found out you could potentially go to jail..not a nice prospect!  You should speak to reputable mortgage broker, perhaps one recommended by someone you know, to consider your options.  Don't be scaremongered into thinking interest rates are going to be spiraling out of control do some research before fixing for 5yrs...don't believe the press!

[matchmade]

J3TUN is being too pessimistic. I've been a BTL investor for seven years and there are lots of buy-to-let companies that don't formally state you are not allowed to live in the property. The rule is a stupid one anyway: what's the problem? You are just renting from yourself, so to speak, as you have to cover the mortgage somehow. Read the small print: I've always been fine, and I've never had a residential mortgage because it was impossible to buy anything on salary multiple: I always bought BTL, even when I was renting a flat elsewhere myself.

The other really valuable point about moving into your own BTL property at some point, even if only for three months to renovate, is that you can then establish the property as your Principal Private Residence for tax purposes. Make sure that the utilities and council tax are in your name and so on, so you can prove residence to the Inland Revenue. Once the house has been your PPR for a period (3 months is the rule-of-thumb absolute minimum), your liability for capital gains tax when you sell the house will be massively reduced, because under the PPR rules you get three years' grace after you move out to sell it, so if you sell after five years you only pay 40% CGT on the gain over two years, plus all your normal deductions. Do your research to get the full facts, but this is the way to keep down your CGT bills on BTL. The Revenue doesn't care whether the mortgage is BTL or residential, but they do care about which is your main house: the treatment of primary residences is pretty generous in the UK, but investment properties are taxed heavily at 40%, unless you go for furnished holiday lettings, which are treated as a regular business for CGT.