Updating post from Reddit.
I have made a quick picture to make things easier - https://imgur.com/cHGDSp5
My Wife's parents passed away 10 years ago and we turned the property into a (really, really nice) HMO. Huge bedrooms, a few of the rooms have their own separate living room, a few studies for home workers, etc.
I know that you get 20% back from interest only mortgage costs and i'm wondering if anyone has paid off or moved their main mortgage to the BTL?
[[See picture for simple details!]]
Has anyone done something similar with regards to mortgage consolidation? Am I missing any vital factors?
You want to pay off your homeowner mortgage by getting a HMO mortgage on your BTL?
Your HMO had a small mortgage already, but you want to increase it?
I want to move my existing mortgage onto my existing BTL mortgage to take advantage of the tax break which would not be present with my home mortgage. I.e remortgage the BTL, use funds to pay off home mortgage
What you're saying is you want to do an equity release on your BTL to pay off your residential mortgage. This is entirely reasonable, you just need to consider the fact that your BTL interest rate will be higher than your residential mortgage, especially with the LTV ratio changing, so you need to do the sums on whether the tax relief is worth it.
Why have I never thought of this....
Because it doesn't make economic sense most of the time. Btl rates are higher. The fees are higher. If you're a higher rate tax payer then you'll be taxed on rental income at higher rate minus relief.
It's useualy the other way, HMO rates & fees are a lot more expencive than residential rates. So you more likely to fund a Landlord wanting to lower the LTV of their HMO at the expence of increaseing the LTV of their home.
The key questions is what's the difference in mortgage rates between the two?
An interest rate increase of c. 1.7% between your domestic to BTL mortgage would increase interest costs by about £8,400 on £490,000.
There's no point in paying £8,400 more interest for £8,400 tax relief.
Approx 4.45% on the BTL (interest only)
Approx 4.18% on the home (standard pay off mortgage)
If the tax relief is worth it, then go for it. Be aware that with a higher LTV the BTL mortgage rate may increase (but there looks to be a lot of wiggle room anyway).
If you move your Residential Mortgage onto the HMO BTL, the outstanding mortgage would be £850,000, so the LTV would be 77.27% (read 80% LTV) on a £1.1m property.
So HMO rates start at 5.74% with £2k fees.
Where your current residential LTV is 51.04% ( read 55% LTV), if you continue with the £490k loan on a £960k property where rates start at 4.20%, with no fees.
I have done this and I and am in the process of doing it again.
The difference for me is that I set up a BTL SVP LTD to handle the BTL mortgages so that I can claim 100% of the mortgage interest as an expense and I am very happy to leverage the equity in the BTL portfolio to pay off my personal mortgage.
Yes you will have SDLT and CGT to pay to move the property to the SPV LTD but if you consider the long term then you will break even of SPV LTD costs within 5 or 10 years.
I set up my BTL SVP in 2013 for some alt property and managed 2 mortgage-free rentals privately via SA. In 2017, I had a personal mortgage of £230k on a property valued at £500k and realised I could release equity from one of my private rentals to pay that off. I projected what my income tax would be compared to corporation tax and realised that if I sold my private rentals to the SPV LTD I'd break even within 5 years. In 2022 I revisited my assumptions and realised the direct and indirect benefits of running my rentals in a BTL SPV LTD were far better than I expected
In July 2023 I bought a new house for £900k with a £550k 2 year fixed mortgage and started renting out my previous home, When things settled down the plan was to move the previous home to the the BTL SPV LTD, I set a window of 2 years based on the fixed rate personal mortgage rate and am on track to sell by end of June 2025. I've been paying off 10% per calender year meaning I'll have cleared almost £150k of the mortgage principle by the time the fixed deal ends leaving me with £400k to pay.
My old home is valued at £575k* and I'm taking out a 73% BTL mortgage releasing £419k equity, after sale costs including CGT, SDLT and convanancing of at least £40k this will allow me to pay off most of my personal mortgage, I can clear of the whole amount if I add some money from savings.
In August 2025 my BTL SPV LTD should have property worth £1.2k with an overall LTV of approx 45%, the LTD is currently bringing in £55k gross income a year. I run my SVP LTD on a 0% tax basis which means all net profit are paid out as Director Pension contributions to my wife. For a few years I did pay my wife a salary just below the NI limit but recent changes reduced the NI to £5k so that is no longer attractive to me.
If we hold on to the BTL SPV LTD for the next 15 years I will bring my children in as employes and Directors when they are old enough,the idea is that we will pass on the LTD to the children and reduce IHT.
Running a BTL SVP LTD will cost at least £1k in accountancy fees a year but I believe that is worth it when the income from rental is greater than £25k a year (arbitrary value) which you more than clear with your income.