WHat is the best way to structure your mortgages if you have a buy-to-let investment?

Question

I have a repayment mortgage and have done for 4 years. It seems odd that other buy-to-letters don't do this. I don't understand. What type of mortgage set up should I have? How do people make money in property? IS there a secret I don't know about!!!? I'm sure it all comes down to financing etc.

Answer 1

Most buy-to-let Mortgages are Interest Only.

This is because :-
1) Lower payments .. the lower the payment, the higher the value of house(s) you can 'own'.
2) Interest (but not capital) payments are an allowable expense (i.e. the Rent you collect can be used to pay the Interest Only Mortgage before it is taxed).

The ideal situation is thus owning as many buy-to-let properties as possible where the Rent from the Tenants is covering the Interest Only mortgage payments. In effect this means each additional house you buy costs is costing you virtually nothing (at least in mortgage payments .. you usually have to put down a 25% deposit).

When you decide to sell up, your have to pay the mortgage lender the original mortgage ammount, but you get all the equity (increase in house price) that has built up.

If the owner is clever he moves into the house before starting to Rent it out, Rents it out for no more than 3 years and then moves in again before selling. In that way he gets maximum PPR (Principle Private Residence) Relief and pays minimal Capital Gains Tax (at least until next April when a flat 18% is being introduced)

This means :-
1) If house prices stop rising, you might as well sell up, cash in the equity and do something else with the funds
2) If house prices start dropping you need to liquidate your portfolio as fast as possible - the best prices will go to those who sell first
3) If Interest rates go up, chances are you can not increase your rents to cover the shortfall .. unless you have substantial other income you will soon be forced to sell up.