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Buy-to-let versus a second mortgage

At Enable in Bishop’s Stortford our IFAs are often asked about buy to let (BTL) as opposed to a second mortgage as BTL loans are not regulated as residential mortgages because landlords tend to be viewed as business borrowers. This means you cannot use a standard BTL mortgage on a property that you or a relative will live in.

Before April last year, when the Mortgage Market Review (MMR) was introduced, about half of lenders that offered BTL mortgages also offered a ‘regulated’ BTL loan that allowed you to name family members as tenants. “The problem is that with a regulated buy-to-let loan you must declare how much rent your family tenant will pay”, says Alistair Hargreaves, mortgage and protection consultant at adviser John Charcol. “Lenders worry that if your tenant is your child or parents this is not fixed and sometimes you may have to help them out with rent. With an ordinary tenant, if they can’t pay you can turf them out but you’re not going to leave your elderly parents on the street. Lenders consider this could put extra strain on people’s finances and it’s a risk they don’t want to take.”

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With a buy-to-let loan, you can claim tax relief against mortgage interest payments, as well as the running and maintenance costs of the property. Second residential mortgages, on the other hand, can land you with a significant capital gains bill. Alistair Hargreaves, mortgage and protection consultant at adviser John Charcol, explains: “Say you bought a cottage in Saffron Walden for £300,000 for your older parents that in the next five years goes up to £450,000, at which point you need to sell it to pay for care costs. This is not your main home, so you will be hit with capital gains  for the increase in property value. The same could be said if you bought your student child a home while he or she was at university.”

Some joint borrower, sole proprietor mortgages are offered by Woolwich. “This type of mortgage lets you put the property deeds in the name of the occupier, while you are still the mortgage holder for the purposes of having your credit file checked and being liable for the monthly payments,” says Hargreaves. “This means that the property is sold only in the parents’ name, so there’s no capital gains liability.”

Enable’s independent Financial Advisors can try and help you find the right deal for you.

Your home could be at risk if you do not keep up your mortgage repayments

Issued by: Enable Independent Financial Life Planners
25c North Street, Bishops Stortford, Herts CM23 2LD
Telephone: 01279 755950 – Fax: 01279 657339
Enable Independent Financial Life Planners is a trading style of Enable Independent Limited is authorised and regulated by the Financial Conduct Authority.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact us.

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