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Nick

Potential daft tax question.

If I have a property with no mortgage on it, which I rent out, and an income after costs of 1,000 pcm, and end up paying 40% tax on that 1,000, does it make sense to borrow against the house, with an interest only loan, and instead of paying 400 to the tax man, pay it to a building society? Because then I'd have 100,000, or whatever the loan was, to sit in the bank, and earn me interest.

Clearly, I'd always owe the 100,000, and if interest rates go up, I'd have to be able to make my repayments, but that aside, am I missing anything?

This is notional, really, or at least the figures are nice and round for simple maths, rather than realistic.
JB

You'd be paying income tax on the interest.
Interest rates for savings are low at present, vastly less than the mortgage payments.
Taking a mortgage and letting the property could be an awkward combination putting up the cost of your mortgage and insurance.

So I'd guess it's not as good an idea as it may first appear.
Nick

You'd be paying income tax on the interest.
Interest rates for savings are low at present, vastly less than the mortgage payments.
Taking a mortgage and letting the property could be an awkward combination putting up the cost of your mortgage and insurance.

So I'd guess it's not as good an idea as it may first appear.


Tax on the interest, yep, but I'd still have 60% of it.

I'd only be paying the interest, and if I don't, I get to pay the tax man.

The mortgage doesn't actually have to be on the rented property; ridiculously, you can borrow against any property, and claim it as a cost, so wouldn't impact on insurance.
Treacodactyl

What would happen if you lost your tenant for a while, you'd still have to pay interest on the mortgage.

You might get advice over on the MSE site.
RichardW

Interesting idea if slightly risky due to interest rates changing.

I guess you will need actual quotes for your situation.
Could you set it up as your pension plan & so benefit that way?
Nick

The risk of the pension plan idea is that it could go down in value. The actual bricks and mortar are the pension plan, to be honest.

The interest rates need watching, but given a fixed rate mortgage it should be manageable.
Shane

Wouldn't it make more sense to remortgage and buy a second rental property? That way your mortgage interest will offset the rental income (at least partially) and you'll have a second set of tenants paying off a second mortgage for you. You'll also be hedging your bets against one of the properties being empty for a period. It's what I'm intending to do if I get an extension to my contract out here - will probably buy a flat next, me thinks.
northmoor

you only get tax relief on the interest, so unless the mortgage interest matches to renal income, you will still pay 40% of the remaining rental income to the tax man.
Shane

True, but at the same time you've got some nice tenants paying off the bulk of your assets for you.
Nick

Wouldn't it make more sense to remortgage and buy a second rental property? That way your mortgage interest will offset the rental income (at least partially) and you'll have a second set of tenants paying off a second mortgage for you. You'll also be hedging your bets against one of the properties being empty for a period. It's what I'm intending to do if I get an extension to my contract out here - will probably buy a flat next, me thinks.


It's a possibility, yes.
wipka84

Given the amount you might stand to save, it's probably well worth an accountant's consultation fee to tell you what option is the best. Shan

The risk of the pension plan idea is that it could go down in value. The actual bricks and mortar are the pension plan, to be honest.

The interest rates need watching, but given a fixed rate mortgage it should be manageable.

The risk is exactly the same with property - values don't always go up adduming it does, the 20 year average per year is not very good anyway.
Nick

The risk of the pension plan idea is that it could go down in value. The actual bricks and mortar are the pension plan, to be honest.

The interest rates need watching, but given a fixed rate mortgage it should be manageable.

The risk is exactly the same with property - values don't always go up adduming it does, the 20 year average per year is not very good anyway.

What's the value of 100,000 of shares if they collapse in value by 98%?

Nothing.

What's the value of 100,000 of house if it collapses in value by 98%?

Lots. It keeps the rain off, and you can live in it.
Shan

You could also put your money in the bank and get a better average over 20 years. Treacodactyl

The risk of the pension plan idea is that it could go down in value. The actual bricks and mortar are the pension plan, to be honest.

The interest rates need watching, but given a fixed rate mortgage it should be manageable.

The risk is exactly the same with property - values don't always go up adduming it does, the 20 year average per year is not very good anyway.

What's the value of 100,000 of shares if they collapse in value by 98%?

Nothing.

What's the value of 100,000 of house if it collapses in value by 98%?

Lots. It keeps the rain off, and you can live in it.

With a personal pension you can invest in property funds that should be less risky than a single property. As single property could be just as volatile as owning single shares. On the other hand less volatility often means a lower return, swings and roundabouts and all that.
Nick

The risk of the pension plan idea is that it could go down in value. The actual bricks and mortar are the pension plan, to be honest.

The interest rates need watching, but given a fixed rate mortgage it should be manageable.

The risk is exactly the same with property - values don't always go up adduming it does, the 20 year average per year is not very good anyway.

What's the value of 100,000 of shares if they collapse in value by 98%?

Nothing.

What's the value of 100,000 of house if it collapses in value by 98%?

Lots. It keeps the rain off, and you can live in it.

With a personal pension you can invest in property funds that should be less risky than a single property. As single property could be just as volatile as owning single shares. On the other hand less volatility often means a lower return, swings and roundabouts and all that.

No, a single property is not especially volatile. You can live in it. Spreading the risk in various properties is indeed not a bad idea.

And, Shan, yes, I could just put it in the bank. That was the suggestion in the first post. Smile
Treacodactyl

No, a single property is not especially volatile. You can live in it. Spreading the risk in various properties is indeed not a bad idea.

I thought you were talking about a 2nd or third property though. Looking at things recently not only have prices dipped but in many areas it's taking a very long time to sell a property. I would be a bit nervous having all my pension in property, some yes.

As for your question "What's the value of 100,000 of shares if they collapse in value by 98%?" that depends, if you're invested in a fund that can short the shares you could make a fair bit. But that's going rather off topic...
Nick

A second, (or third) property, can be sold, lived in, rented out, or borrowed against. It's not the only pension plan, but certainly it's performed better than the fragmented bits and pieces both I and the wife have had through various public and private employers.

It's all irrelevant anyway, the children will have frittered everything we own away on University bills within 10 years, anyway, and she'll make me work until I die at 75. Rolling Eyes
Treacodactyl

Don't worry, I bet there'll be advances in medicine that'll keep you alive 'till you're 100 and you can work even longer. Wink Nick

I hates you. stumbling goat

Children going to Uni? Buy a place in that town where the child can live as a LL with lodgers (fellow students).

sg
john of wessex

My personal punt is that the property market may be in for an interesting time.

Cuts in Housing Benefit and rising unemployment will make for an interesting time in the BTL market.

Unlike shares , property is a rather inflexible assett, so you ay nt want to put all your money in it.
Shan

There was an article in the The Economist basically saying that property is currently over-valued by at least 30%. Shane

There was an article in the The Economist basically saying that property is currently over-valued by at least 30%. Depends where it is as much as anything else
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