Interest rates

[andyinluton]

More details please!

In simple terms he's just saying remortgage your a house and spend the money.

 

[Amarillo]

More details please!

Do you remember MIRAS?

It disappeared for residential property in the mid 90s.

It still existed for BTL landlords in a similar form right up until about five years ago when it was replaced with a 20% tax credit on mortgage interest paid for those who rent out a mortgaged second home.

For every £100 of mortgage interest paid by a BTL landlord, £20 is knocked off their tax bill.

Effectively it means that a mortgage interest rate of 4.79% is 3.832% to a BTL landlord.

 

[Amarillo]

In simple terms he's just saying remortgage your a house and spend the money.

Not quite. But so long as a BTL property keeps rising in value, it is possible for the owner to repeatedly take equity out of the property tax free.

It is something I am contemplating doing, but it is not without risk.

But I would not spend the money as you suggest I would, but invest the money and spend the dividends of those secondary investments.

In essence, I’d keep 40% equity in my BTL portfolio and 60% of the portfolio’s value in shares.

That would give me four passive income sources.
1. Rent - taxed normally
2. Share dividends - 8.75% tax
3. Property price inflation - tax free
4. Share price inflation - CGT

I’d have to pay hefty mortgage interest - this is a known cost over a five year period, so the greatest risk to me would be share yield being lower than 80% of the mortgage interest rate.

 

[2into1]

Do you remember MIRAS?

It disappeared for residential property in the mid 90s.

It still existed for BTL landlords in a similar form right up until about five years ago when it was replaced with a 20% tax credit on mortgage interest paid for those who rent out a mortgaged second home.

For every £100 of mortgage interest paid by a BTL landlord, £20 is knocked off their tax bill.

Effectively it means that a mortgage interest rate of 4.79% is 3.832% to a BTL landlord.

Thank you. My rentals are owned outright (obvs not in London so rather easier) so I don't think it will help me. With a clapped out Cali and a very relaxed attitude towards earning, I wouldn't probably get a mortgage now!

 

[Amarillo]

Thank you. My rentals are owned outright (obvs not in London so rather easier) so I don't think it will help me. With a clapped out Cali and a very relaxed attitude towards earning, I wouldn't probably get a mortgage now!

Where’s your ambition!?

If you own 100% of a property you get 100% of the benefit of any increase in value.

If you own 40% of its value with 60% mortgaged you still get 100% of the benefit of any increase in value.

But it is what you do with the other 60% of the value which is significant. Spend it as @andyinluton suggests and it has gone. But invest it and it you can benefit from that too.

In effect you can benefit from 160% of the value of your property, set against the cost to you of 80% of your mortgage interest payments.

And yes, if you have rental properties you can mortgage them even if you have little other income than your rent.

 

[soulstyledevon]

This is all well & good in a market that’s increasing. But how can it possibly continue…


Note, I said this is 2010

 

[Mansfieldman750]

Where’s your ambition!?

If you own 100% of a property you get 100% of the benefit of any increase in value.

If you own 40% of its value with 60% mortgaged you still get 100% of the benefit of any increase in value.

But it is what you do with the other 60% of the value which is significant. Spend it as @andyinluton suggests and it has gone. But invest it and it you can benefit from that too.

In effect you can benefit from 160% of the value of your property, set against the cost to you of 80% of your mortgage interest payments.

And yes, if you have rental properties you can mortgage them even if you have little other income than your rent.

I’ve rehashed that advice in the interest of balance.
if you own a property outright you suffer a paper loss on any decrease in it’s value.
If you own 40% of its value with the other 60% mortgaged you still suffer the same paper loss.
If you stick the 60% you have released into the stock market and the stock market falls you suffer that loss too.
Your rental tenants stop paying rent because the cost of living crisis is hitting them hard.
You can’t afford the mortgage.
That’s about the time the bailiff will come knocking at your door.

 

[sidepod]

Booming house prices over your working life, job security if not a job for life, solid pensions often gold plated final salary etc etc. None of which enjoyed by my generation nor likely to be by my children's or future grandchildren's so forgive me for not shedding a tear.

Being a bit crap at life wasn’t really an option when I was a kid in the 70s. Then again, we never had the internet to tell us to blame someone else!
Sink or swim I believe is the phrase.

 

[andyinluton]

Thank you. My rentals are owned outright (obvs not in London so rather easier) so I don't think it will help me. With a clapped out Cali and a very relaxed attitude towards earning, I wouldn't probably get a mortgage now!

Keep them owned outright, safest way to be.

Amarillos advice to remortgage in todays uncertain market, in order take advantage today of a tax benefit that has been steadily withdrawn over the last 5 or so years is madness.

You end up relying on income from tenants to cover your new borrowings.

Mortgaging to 60% on the face of it sounds ok but capital gains liability could be 28% add in estate agents & legal costs along with a void period easily turns your equity come selling time to zero.

 

[The Tall Luthier]

Keep them owned outright, safest way to be.

Amarillos advice to remortgage in todays uncertain market, in order take advantage today of a tax benefit that has been steadily withdrawn over the last 5 or so years is madness.

You end up relying on income from tenants to cover your new borrowings.

Mortgaging to 60% on the face of it sounds ok but capital gains liability could be 28% add in estate agents & legal costs along with a void period easily turns your equity come selling time to zero.

I tend to side with Amarillo on this. Not withstanding the risks that you pose, it can easily go wrong if you take your eye off the ball.

For me, I do the 100% thing, I’m lazy. But I’m acutely aware that the majority of successful wealthy companies leverage debt in order maximise their capital assets. If it works for them it certainly works for landlords.

 

[Amarillo]

I’ve rehashed that advice in the interest of balance.
if you own a property outright you suffer a paper loss on any decrease in it’s value.
If you own 40% of its value with the other 60% mortgaged you still suffer the same paper loss.
If you stick the 60% you have released into the stock market and the stock market falls you suffer that loss too.
Your rental tenants stop paying rent because the cost of living crisis is hitting them hard.
You can’t afford the mortgage.
That’s about the time the bailiff will come knocking at your door.

No one suggests that the strategy is risk free. But I suggest now that the strategy of splitting your money 40% property 60% stock market is lower risk than 100% property. This is because a drop in the value of stocks and property is less likely than a drop in the value of stocks or property.

 

[The Tall Luthier]

No one suggests that the strategy is risk free. But I suggest now that the strategy of splitting your money 40% property 60% stock market is lower risk than 100% property. This is because a drop in the value of stocks and property is less likely than a drop in the value of stocks or property.

Of course if you’re at this level you should be thinking as much about IHT as you are income maximisation.

How do you put your assets into a wrapper, from which you can derive benefit, that can be passed on to your kids without Hector the Inspector taking their 40%? Family Trust? Limited company. So many options.

 

[Amarillo]

Keep them owned outright, safest way to be.

Amarillos advice to remortgage in todays uncertain market, in order take advantage today of a tax benefit that has been steadily withdrawn over the last 5 or so years is madness.

You end up relying on income from tenants to cover your new borrowings.

Mortgaging to 60% on the face of it sounds ok but capital gains liability could be 28% add in estate agents & legal costs along with a void period easily turns your equity come selling time to zero.

I would say that today’s market is less uncertain than this time last year (when continuing ultra low interest rates seemed likely or even certain). Those of us who lived through 14.75% mortgage rates knew we were having good times and used those good times to pay off mortgages. Younger less experienced players moved to ever bigger and more expensive homes, taking on debt they now cannot afford.

But far from being uncertain, todays market is clear. A drop in house prices of up to 20% followed by a sustained period of stagnation. And, of course, if you take out a five year fixed rate mortgage you have certainty for five years.

You also seem hung up on fees. Goodness only knows why you think estate agent fees would be payable to remortgage a property you already own!!! Either go direct to a lender and pay for a basic valuation or use a broker and pay any fees they charge as well as the valuation. Some mortgages come fee free usually with higher rates than those with fees. Do your maths to work out which is best for you. If you are switching lenders you will also need to pay a (modest) fee for the release of charge; £50 or £100 is about right (though £300 is not unheard of). But with due diligence all costs are known *for five years in advance* and are far from uncertain.

So with near stagnant house prices more likely than not for the next five years, where better to seek capital gain than a basket of worldwide stock markets as the global recovery from the coronavirus pandemic begins.

There is zero capital gains tax on taking out capital gain by way of a mortgage.

 

[Amarillo]

Of course if you’re at this level you should be thinking as much about IHT as you are income maximisation.

How do you put your assets into a wrapper, from which you can derive benefit, that can be passed on to your kids without Hector the Inspector taking their 40%? Family Trust? Limited company. So many options.

I’m not at that stage of thinking.

My father and I between us max out my boys’ JISA allowance each year, and that should give them a tax free windfall to see them through university and give them keys to their own home. They should be able to start their working life better off than most, so long as they don’t end up snorting their good fortune up their noses.

 

[GrannyJen]

Of course if you’re at this level you should be thinking as much about IHT as you are income maximisation.

How do you put your assets into a wrapper, from which you can derive benefit, that can be passed on to your kids without Hector the Inspector taking their 40%? Family Trust? Limited company. So many options.

Overseas discretionary trust, Max £325k every 7 years and it only becomes IHT exempt once you have lived longer than 7 years since making the gift. I am now chewing fingernails in the hope that I live past 83

 

[The Tall Luthier]

Overseas discretionary trust, Max £325k every 7 years and it only becomes IHT exempt once you have lived longer than 7 years since making the gift. I am now chewing fingernails in the hope that I live past 83

The £325K is wrong. You can give any amount of money away as a gift. The seven year rule still applies.

The £325 is an IHT allowance meaning it would never be subject to tax anyways.

 

[andyinluton]

You also seem hung up on fees. Goodness only knows why you think estate agent fees would be payable to remortgage a property you already own!!!

Try reading my post properly - when you have decided you have had enough of renting out houses to tenants that don’t pay how are you going to dispose of it then without estate agents or fees or paying capital gains?

 

[GrannyJen]

The £325K is wrong. You can give any amount of money away as a gift. The seven year rule still applies.

The £325 is an IHT allowance meaning it would never be subject to tax anyways.

I will tell my professional advisors that.

IHT allowance of £325k is on the total estate. If £325k is in an offshore discretionary trust existent for over 7 years then that is exempt for IHT and therefore out of the total estate. It also allows you to bring up to 5% of the settled amount back onshore every year exempt from any tax. Any capital gains or income accruing from the date of settlement is also exempt from UK taxation.

I had looked at an onshore discretionary trust, beneficiaries my grandchildren., but the idea of them paying 35% tax every year put me off.

 

[GrannyJen]

The £325K is wrong. You can give any amount of money away as a gift. The seven year rule still applies.

The £325 is an IHT allowance meaning it would never be subject to tax anyways.

I meant to also add:

£325k is the current NRB used for calculating IHT to be paid. Any gifts over that amount paid into a discretionary trust will attract tax, hence my use of the word maximum as the whole idea of such a trust is to avoid paying tax.

 

[Amarillo]

Try reading my post properly - when you have decided you have had enough of renting out houses to tenants that don’t pay how are you going to dispose of it then without estate agents or fees or paying capital gains?

I had previously addressed that.

Zero CGT if you die.

Effective 16% IHT on a property mortgaged at 60%.

We have been renting out property for 15 years. Non payment of rent has probably cost us less than 3% of rental income. Void periods are a bigger cost. As we grow older I expect management fees will start to eat a bigger chunk of costs. Maintenance is steady.

 

[GrannyJen]

I had previously addressed that.

Zero CGT if you die.

Effective 16% IHT on a property mortgaged at 60%.

We have been renting out property for 15 years. Non payment of rent has probably cost us less than 3% of rental income. Void periods are a bigger cost. As we grow older I expect management fees will start to eat a bigger chunk of costs. Maintenance is steady.

As you get older ....

I had a house in Kew, London, divided into 6 self-contained flats. A nice little earner and a nice inheritance for my children.

In 2013 I was exhausted after battling cancer for 4 years, had just moved house to where I am now, looked at myself in a mirror and thought "Jen,, you are 66 years old, you have everything you need except peace in your life, is the hassle worth it"?

On a total impulse, over the next two days I walked away from my role with the Imperial War Museum, quit my supervisory role at the Institute for Historic Research, gave all rights to my tour guides to the Oregon tourist authority and University of Virginia and agreed a price with a property developer for him to buy my London property.

People thought I was mad, especially the last bit, and the IWM had me back in the traces the following year for the WW1 centenaries but I consider it the very best thing that I ever did.

Edit: I should add that I also bought a Cali and vowed, after 20 years of relentless intercontinental travel, never to fly again, a vow I will be breaking for the first time this October when I visit my son in Arizona.

 

[The Tall Luthier]

I’m not at that stage of thinking.

My father and I between us max out my boys’ JISA allowance each year, and that should give them a tax free windfall to see them through university and give them keys to their own home. They should be able to start their working life better off than most, so long as they don’t end up snorting their good fortune up their noses.

Alternatively of course you could set up a limited company with assets from alll four of you, a dividend structure that makes use of their tax free status, and invest in properties.

On the day you and dad expire, the company is untroubled by IHT.

Definitely tax efficient but a whole new level of complex.

 

[andyinluton]

Zero CGT if you die.

Effective 16% IHT on a property mortgaged at 60%.

So your exit strategy for getting rid of your heavily mortgaged rentals is to drop dead to save a bit of tax.

 

[yossarian]

This thread's a fine read and I'd encourage everyone to do their best to avoid getting it 3 cocked.

 

[Amarillo]

So your exit strategy for getting rid of your heavily mortgaged rentals is to drop dead to save a bit of tax.

Valar morghulis.