Refinance
This is relatively straight forward, most Buy-to-Let lenders will allow you to borrow more if the rent is sufficient to cover the mortgage plus a bit. They will stipulate that the rent is 130% to 150% of mortgage payments. They will also want a revaluation and administration fee.
The big proviso for the plan to work is will rents rise in line with capital values and interest rates. Although capital values generally double, on average, every seven to ten years, rents double, on average, every seven to twelve years. In other words, rents increase slightly more slowly than capital values.
If you started with some ‘slack’ this shouldn’t present a problem. But ultimately the rent receivable will limit the amount you can borrow.
There are limits, as well, as to how many times you can remortgage: lenders will pull the plug when you start getting near to sixty.
Pocket your tax-free lump sum
In theory this cash lump will be tax-free. Because it is not strictly earned income, there will be no income tax. And Capital Gains Tax will only be payable on the disposal of the asset.
However, I have a sneaking suspicion that the Inland Revenue will want to look a little closer if they see this happening on a regular basis.
What I am sure about is that, because the loan is not ploughed back into the ‘business’, you will not be able to off-set that element of the interest on the loan against the rent as an allowance for income tax.
So there we are. With some thought planning and careful research, I think that this is indeed an interesting and workable plan to use property as a ‘money tree’ producing regular crops of nice, juicy, tax free cash.
I don’t think I’ll quit the day job just yet, but I’m certainly looking around for bargain properties which I can tuck away and harvest in five years time. And this plan is so simple, and so relatively easy to implement, just about anyone can put it into action in their spare time, knowing that in as little as five years, this could become their full time occupation.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor
