Buying a small property via a friend in then UK. Cost of property is 125k, I have a large deposit of
40k for this (32%) so I’ll be taking a mortgage out for 85k. I can get 650p.m. rent and ground rent is extra.
The only rate I’m being offered is 6.6%, does this seem very high?
Repayments will be 580 p.m. on that % and I’ll mean I only really have 75 to pay ground rent and for sinking fund.
Real Q is, isn’t 6.6% BTL mortgage really high?
Can’t advise regarding the mortgage interest rates, there are a couple of issues here you might consider aside from whether 6.6% is high or not.
- Your gross return is approximately 6.2% - that’s your first problem. While not ridiculously low (4%), it isn’t particularly attractive either. Could you not pursue a property with a higher yield?
- As the margin here is quite low between cash inflows and outflows (ignoring any other expenses that can and will arise), you may end up with negative cashflow because of tax even if you are ‘breaking even’. Normally you will be obliged to file a UK tax return, but you wont pay any tax as they give personal allowances in excess of what your yearly rent would be. You will have to declare your income from the property here in Ireland on your Form 11 (if applicable) and your mortgage interest relief is restricted to 75%.
To give a basic example with some made up figures:
Rent 2015: €5,000
Ground rent: -€200
Interest (100%): -€3,300
Capital repayments: -€1,500
Net cash inflow: €0
Adjust for tax:
Rent 2015: €5,000
Ground rent: €200
Interest (Restricted to 75%): €2,475
Capital repayments (not allowed): 0
Assessable profit: €2,325
Tax at higher marginal rate (51%): €1,189
Net cashflow before tax: €0
Net cashflow: €-1,189
That’s just an example and assuming you’re on the higher rate.
There are no shortage of unforeseen expenses with rental properties, there are always repairs and other expenses that crop up. I assume your above point about the 75 left over is merely hypothetical, but in reality you wouldn’t want to be tight for cash getting into this kind of endeavour. Who is going to manage the property for you? Who will let it? You could be talking about a big hit from your rent for those two alone if you haven’t got somebody able and willing to do that for free and then there’s the matter of whether you can afford extended periods with no renters if there’s a low demand / when you’re between renters.
If you’re happy to make annual losses on the property with the long-term goal of owning it mortgage free and reaping the benefits from that then it may be worthwhile. If you’re looking for something that will pay its own way and not require any financial strain on your part other than the initial deposit, you may want to consider something with a higher yield.
I sold a property in the UK with a decent return because it was too far away from where I visit to manage and the managements costs made it look less attractive.
It was a tracker mortgage and while it was a very decent mortgage the hassle of managing the property wasn’t worth it. I was offered 35k more that I paid for it
so I sold.
Other things of note on this property is that I’m getting a bit of a deal on it and it’s market value is probably closer to 135k.
There are also building a tube stop near the flat (it’s in North London) so it’ll go up in value on approx 2 years time.
When you say rent of 5k, where do you get that figure?
I’m not 100% sure of the rest of the calculations tbh, I think my rent is higher but not sure about capital repayments and interest.
I’m just using made up figures for demonstrative purposes. As you have already owned a UK rental property I’m sure you’re well aware of the realities - the post was more for informational purposes in case this was your first.
If I was in your position I would run the numbers again - find out what comparable properties are renting for, make sure you have all the information regarding yearly building/maintenance fees and any other major expenses - and from that assess whether or not it is worth pursuing based on the interest rates being offered. You’re already at an advantage by getting an initial break on the market value (again, maybe just see what is presently on the market and make sure you are getting a ‘deal’ that will hopefully bring you a good capital return) so perhaps that will outweigh the negatives of it not being particularly lucrative from a yield perspective.
Oh, ok, thanks again.
Yes, I have experience of the market, but this is only the second mortgage I’ll be getting so I don’t know
the mortgage market that well. It seemed very high to me, esp compared to the last one I had.
I thought it’d be closer to Irish levels.