I need to buy a bigger house.

Should I sell my current house?

When you move home, you normally have to sell your current property, especially if you need the money to buy a new one. But there are occasions when it makes practical or financial sense to keep the old home. If you rent your old house out rather than sell it, you could end up over time with a valuable asset that generates a
regular income.

When does renting out the old home make sense?

  • If you are just moving temporarily, perhaps for work reasons, and you want to keep open the option of moving back to your old house

  • If it is a good rental property and you are confident that property prices are going to rise – and you have enough money that you do not have to sell your old one to fund buying the new home

How can I finance two properties?

Clearly, you should only consider doing this if you are financially secure, and financially literate – if you are already stretched, and not confident dealing with financial matters, then you could end up really regretting it.

You are more likely to be able to buy a new property while keeping your old one if you have major equity in your existing property, and a sufficient income to easily finance the mortgage on your new property.

If you need to raise the deposit for the new property, you can then do that by increasing the mortgage on your existing home, the payments for which should be covered by the rental income.

You will then need to take out a second residential mortgage on your new home, the payments for which would be covered by your normal work income.

You will then have two mortgages, one on each property, covered by the rental income and your normal income.

Will I be able to pay the mortgages?

If you move out but still have a mortgage on your old property (whether you are buying or renting a new place), you need to work out whether you will be able to keep up with the monthly repayments on that mortgage – in
addition to the mortgage on your new home.

Your mortgage lender is likely to insist that the rental income is enough to cover the mortgage interest payments.

But there are many other factors that you need to consider:

  • How many months of the year are you likely to be able to rent it out? As a rule of thumb, you should reckon on one month a year where it will be unrented (for example, when you are looking for a new tenant)

  • Will you be able to cover the mortgage if you are unable to rent it? You should be confident that you could avoid a forced sale or repossession if you have difficulty renting it out for a while

  • Will you be able to pay for the property’s maintenance? Can you afford a new boiler? What if the house gets damp? Or if it needs a new roof?

  • Will you manage the property – or will you pay somebody to do so? How much will that cost?

  • Will you rent it through an agent? What commission will they take?

  • Have you factored in insurance into the total monthly costs?

How much will it cost me to live in the new place?

The ability to afford to keep your old home will depend not just on the rental income you get, but the cost of living in your new place.

Will I have to pay income tax?

Yes you will.

Until now, landlords have been able to claim tax relief on the mortgage interest they pay on their mortgage repayments. They would only pay tax on the profit they made and the amount they’d pay depended on which tax band they were in.

However, from April 2017 this will change. In a new system, that 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 they’re in. A landlord in the higher tax band, therefore, will pay tax on his rental income at 40%  or 45% but will only be able to claim 20% back tax relief.

Will I have to pay capital gains tax if I 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.
You do not have to pay capital gains tax if you sell your primary residence (i.e. your main home) at a profit, but you might have to if you sell a second home. The capital gains tax regime is frequently changed by the
government, and the calculations are complicated, so you should seek advice either from a tax adviser or directly from HMRC. In general:

  • 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 kicks in eighteen months after you move out, i.e. if you sell it within that time 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 18 months), 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.

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