A useful regular income
Usually people have to sell their house in order to buy their new one, but sometimes it can make financial sense to keep your existing home as letting it out could provide you with a useful regular income.
- When it could be a better plan to keep your old home (and you have sufficient capital to buy without selling)
- When your career involves you moving to a different area but you still want the option of moving back to your old home.
- When your old home meets popular rental demand in your area and you are confident that property prices are going to rise.
If property prices are not currently rising, should I still keep my old home and rent it out?
- When prices are rising, it offers a brilliant opportunity to build up a rewarding property portfolio.
- If prices are falling however, you may be better off selling (although if you are anxious to secure the new house of your dreams, you will be able to present yourself as an unencumbered buyer with obvious negotiating advantage).
- Think how long you would want to let out your home: if it’s a long-term plan, renting your old home may still be advantageous. If it’s not, then selling would make sense.
If you have a mortgage, will you be allowed to let it out?
- Check with your loan source directly. Some will not let you; others will all you to for up to a year, and others will allow you to rent it out for a limited period providing it is work-related or you intend to move back.
- Bear in mind that if you do have to change your loan source, you may well have to use a buy to let mortgage with its comparative increased costs.
How do you pay for two properties?
- Importantly you need to be financially informed. Only if you are financially secure, should you choose this option. It is only very likely that you will be able to raise funds if you have sufficient equity in your old home and can sensibly afford the mortgage on your new home.
- If you need the deposit for your new property, you can raise it on your old home, using the existing equity. You will then need to take a residential mortgage on your new property, the payments for which would be covered by your salary. In total, you will have two mortgages: one which will be covered by the rental income, and the other by your salary.
- Work out if you can cover both mortgage repayments if necessary.
- Allow for generally one void month per year (eg. when you’re looking for a new tenant).
- If you have difficulty renting it out if the market changes, you need to be confident as to whether you can afford a drop in rental income.
- Bear in mind, all properties need maintenance: ensure you can cover the cost of a new boiler, or plumbing problem, or leaky roof etc.
- Be realistic about the time you have to manage the property and remember to allow for the cost of your agent handling this for you.
- Factor in the buildings insurance costs, or if a leasehold property, the service charges, into your total monthly costs.
- Remember you still have the usual running costs of your new home.
What income tax do I pay?
From April 2017 a new system, will be phased in. Landlords will have to pay tax on their entire rental income (not just the profit) and they’ll only be able to claim tax relief at a rate of 20% (regardless of what tax band you’re in). So, if you are a higher rate tax payer at 40/45% you will only be able to claim tax relief back at 20%.
What about capital gains tax when you sell?
Capital gains tax is a tax on the profit – or ‘gain’ – you make when you sell an asset that has gone up in value. CGT does not apply when you sell your main home. However, governments make changes all the time, so be sure to check.
- You do not have to pay any capital gains tax if you are not selling the second property at more than you bought it for – or indeed, if you don’t sell it at all
- If you used to live in the house you are selling, then capital gains only applies three years after you move out, i.e. if you sell it within three years of moving out, you will not have to pay any capital gains tax.
- You only pay capital gains tax for the period you have not lived there (minus the three years grace period), and this is worked out on a pro-rata basis as a proportion of the total gain in the value of the property while you have owned it
- The rate of capital gains tax is tapered (i.e. the longer you own something, the lower the rate you pay), and there are annual allowances, so the total tax bill may be less than you first expect