Going from Owner Occupier to Buy to Let

greenasgrass

Hi,

Can anybody give advice from going from an owner occupier to a buy-to-let. I bought by house in 2006 and am moving to Dublin so must rent it out. If I do it above board it seems that I will:

1. Lose my mortgage interest tax relief
2. Need to pay tax on my rental income
3. need to change my mortgage from owner occupier to buy-to-let, thus increasing my interest rate from 2.1% to 3.6% (at best!)
4. Need to change my house insurance to landlord insurance

This effectively means that by moving out and renting the house I will be paying the same towards my mortgage. i.e.

Current situation
Mortgage based on 2.1% after tax relief: €750/month

If I rent the house
Mortgage based on 3.6% without tax relief:€1050/month
Expected Rent: €650/month
Expected Rent after Tax (40%): €390
Monthly cost to me while rented: €660/month

So if I just leave the house empty it will cost me €90 more per month than if I rent it. Is this really the case? Am I that screwed?! I realise I can write off some of the tax on the income on expenditure (cleaning, repairs, rennovation etc) but this wont make too much of a difference.

Any advice would be much appreciated!

Regards,

g

Treehouse72

I cannot speak to the technical issues, but I will make 4 quick points:

1. Do not even think of not doing this above-board. You simply will not get away with it. There are a lot of stressed BTLers out there at the moment and if they could get away with scams, they'd all be at it. Fact is, it'll more than likely end very badly for you.

2. You must be brutally honest with yourself about achievable rent. There is a lot of rental property out there, so make sure you are not just picking numbers out of the air or basing your projections on 2006 rents or whatnot. Location, quality of property, competition in area etc. all inform this guesstimate.

3. Whatever rent figure you come up with, you must discount from that figure allowances for void periods (you won't have it rented 52 weeks of the year) and for maintenance/taxes/fees (everything from painting to fixing the washng machne to the second home tax to the likely new property tax etc.) I believe the general rule of thumb is to count on 10 or 11 months rent, not 12, assuming there are people out there to rent it in the first place.

4. I know 2 people who rent out a property and both say that it is far more expensive and time-consuming than they had envisaged. One friend said if he'd known what a pain it was he'd never have bothered.

faddius

I have a similar problem. I've lived in my house for 3 years and now want to move out.

I have an owner occupier mortgage with AIB on a fixed rate for another 2 years.

Q1 Do I have to inform AIB that I am no longer living in the house?

Q2 Do I have to change to another mortgage type?

Q3 Will PRTB or insurance company inform AIB if I don't?

Thanks

greenasgrass

Faddius,

Same as you. I've lived there for three years. I think the answer is yes to all your questions although I'd like a (professional) opinion to confirm.

One way I can see around it for myself is if I rent the rooms in the house individually. If I do this and keep a room for myself I would technically still be owner occupier and benefit from the rent a room allowance (which covers up to €10,000 rental income). I'd also keep my interest tax relief and not have to change my mortgage to a buy-to-let. Again I'd appreciate a professionals opinion on this. I know it would take a bit more management but I already have one tennant as it is so it would mean maybe renting out one other room.

Treehouse72.

Thanks for the post.

1. I want to do everything above board. The query is if I am correct in my assumptions in my initial post.
2. I have checked out numerous similar properties in the area and €650 a month is a conservative estimate of rental.
3. Fair point
4. I wish I'd known them when I bought the damn house!

G

um7y1h83ge06nx

greenasgrass wrote: »

Faddius,
One way I can see around it for myself is if I rent the rooms in the house individually. If I do this and keep a room for myself I would technically still be owner occupier and benefit from the rent a room allowance (which covers up to €10,000 rental income). I'd also keep my interest tax relief and not have to change my mortgage to a buy-to-let. Again I'd appreciate a professionals opinion on this. I know it would take a bit more management but I already have one tennant as it is so it would mean maybe renting out one other room.

That's not quite above board either, I think. I've been trying to find the definition of principal private residence but I don't think that would meet the criteria. I checked it out before as I was curious what the definition of a principal private residence was.

If I find the link again I'll post it.

The_Conductor

A Principle Private Residence is purely a tax designation, and is open to the interpretation of a tax inspector. In general, it would be where a person resides most of their time- and they may be asked to support this with documentation showing household bills relating to residency, or where they own multiple properties, a business diary showing significant ongoing appointments in the closer vicinity of the designated PPR than other properties, may be requested.

The Revenue Commissioners are getting incredibly tough with determining PPR stati - if there is any doubt at all in your mind- contact a tax consultant and clarify what steps are necessary to clear up any potential 'misunderstandings'.........

um7y1h83ge06nx

Still can't find that link but what I saw from a government website before was that at a hih level, your principal place of residence is the place where you generally leave to attend work and return to afterwards. Now there was loads of others scenarios as well, but it seemed pretty water tight.

But all this is just recalled from memory so as smccarrick says, check it out.

wench

greenasgrass wrote: »

Current situation
Mortgage based on 2.1% after tax relief: €750/month

If I rent the house
Mortgage based on 3.6% without tax relief:€1050/month
Expected Rent: €650/month
Expected Rent after Tax (40%): €390
Monthly cost to me while rented: €660/month

So if I just leave the house empty it will cost me €90 more per month than if I rent it. Is this really the case? Am I that screwed?! I realise I can write off some of the tax on the income on expenditure (cleaning, repairs, rennovation etc) but this wont make too much of a difference.

Mortgage interest is also an allowable expense (provided you have registered with the PRTB).
You deduct 75% of the interest from the rent to get the taxable amount, in this case probably nil.
So the cost to you is about €400 each month.

greenasgrass

Cheers Supersonic.

I imagine you're right in that I can't really claim it as my PPR even though I'm renting in Dublin and own no other properties.

greenasgrass

Cheers Wench,

That's really useful information. So I probably wouldn't be liable for income tax by the sounds of it especially after only 3 years of a mortgage.

I guess I could go to the bank and see the best deal I could get on a BTL mortgage. If I could get less than 3.6% then I suppose €300-400 on a month wouldn't be a killer.

The_Conductor

greenasgrass wrote: »

Cheers Wench,

That's really useful information. So I probably wouldn't be liable for income tax by the sounds of it especially after only 3 years of a mortgage.

I guess I could go to the bank and see the best deal I could get on a BTL mortgage. If I could get less than 3.6% then I suppose €300-400 on a month wouldn't be a killer.

To be perfectly honest- you'll be doing incredibly well to get 3.6% on a buy to let mortgage, particulary if the property was only bought 3 years ago, as its almost certain to be in negative equity (unless you had a sizeable deposit when you originally bought it). Also- there are no tracker products available anymore- and BTL mortgages are 1.6-2.4% above owner occupier rates.

I would be most surprised in the current context, if you had taxable income after the deduction of allowable costs- but you need to be realistic about quantifying your costs (allowing for large increases in interest rates, and possible periods of vacancy).

S.

greenasgrass

I got those BTL rates off the AIB website.

1 year fixed was 3.49% and 2 year fixed waws 3.6%. The house is in neg equity but only just as I have lumped some savings over the last year. Judging by valuations of adjacent properties I imagine I could get a valuation for the value of the mortgage although with the way things were the house would probably sell for 5-10% less than the valuation. But as you say the mortgage is in year 4 of 35 so getting 3.6% might be a bit of a stretch. I'll have to talk to the bank manager but any other advice would be appreciated.

Regards,

g

Joey the lips

Option B. Rent rooms out. Claim tax allowence and have control of the house?????

You are still principle. Must keep 1 room for yourself.

The_Conductor

Joey the lips wrote: »

You are still principle. Must keep 1 room for yourself.

Revenue Commissioners are taking an increasingly dim view of this. If you are not physically residing in the property- regardless of whether you've kept a room for yourself or not- you will get caught.

Revenue are going to bizarre lengths to try to catch people out these days- make sure you don't give them an ounce of reason to examine your affairs.

greenasgrass

You'd think that revenue wouldn't care either way since I'd be exempt from tax if I included my interest. I would've thought the bank would be more concerned as you are getting a preferable interest rate based on false information.

Either way, if there is a grey area I'll steer clear. I'm just trying to find the best way to do it legally.

The_Conductor

greenasgrass wrote: »

You'd think that revenue wouldn't care either way since I'd be exempt from tax if I included my interest. I would've thought the bank would be more concerned as you are getting a preferable interest rate based on false information.

Either way, if there is a grey area I'll steer clear. I'm just trying to find the best way to do it legally.

Interest can be included @ 75% of total for 2010- but they are phasing this out altogether (along with phasing out mortgage interest relief for owner occupiers). Its supposed to be gone by 2015 for BTL owners (and TRS relief altogether for owner occupiers by 2018, depending on when they purchased). Its useful now- but is not going to be around for long- if you're relying on using interest to bump up your allowable costs- you're going to have a big issue down the line.

greenasgrass

If I can keep the place for a further 2-3years and not lose too much money I'm hoping that the market will have turned a bit and I'll sell on then. I'm not really thinking in the long term. Just the next 2-3 years.

The_Conductor

Current projections are for interest rates to start increasing in Q4 2010, to 'normal' levels possibly taking 24-36 months to reach normalisation. The ECB view normalisation as overnight rates of 4.4-4.6% (current overnight rates being 1%). An increase of 3.6% in interest rates (probably higher in an Irish context because margins were kept abnormally low for political reasons), is going to hurt a lot of people.

If you are in property for the long haul- you'll probably be ok eventually- but if you intend to offload in the next 5-10 years, you could get seriously burnt........

greenasgrass

I guess it's easy to get used to record low ECB rates alright.

I know they have to go up again and have factored this into a three year plan. I realise I could get burnt but until I'm ready to buy another house I don't see the point of selling at the bottom (if it is in fact the bottom). The way I look at it if the interest rates go up I'll have to take the additional pain involved. Hopefully as they rise so will inflation and rent thus somewhat negating said pain.

In fairness I could be a lot worse off.

Treehouse72

greenasgrass wrote: »

If I can keep the place for a further 2-3years and not lose too much money I'm hoping that the market will have turned a bit and I'll sell on then. I'm not really thinking in the long term. Just the next 2-3 years....

....Hopefully as they rise so will inflation and rent thus somewhat negating said pain.

In my opinion in 3 years time property prices will be 30% - 40% below where they are today. More than that will come off for apartments in bad locations.

Rents are much closer to being at the bottom now, notwithstanding dramatic changes to rent supplement rates. However, this should not be taken as a sign that they are therefore likely to rise. The reason they are near the bottom is because the rental market is fairly fluid, and rents rise and fall more responsively than house prices to demand. So, rents have now reached close to their correct level as set by supply:demand. This bottoming-out of rents is the logical next inevitable stage in the property crash. What will next happen is that house prices will fall to intersect with those rents to produce yields that are sustainable for invetors. Rents can only then rise if house prices do, if rental demand increases or if general inflation pushes up prices. I don't think any of those things are going to happen this decade.

D3PO

Treehouse72 wrote: »

In my opinion in 3 years time property prices will be 30% - 40% below where they are today. More than that will come off for apartments in bad locations.

Rents are much closer to being at the bottom now, .

this is pretty much a contradiction. your numbers dont add up. 40% drop in prices and rent near the bottom ?

you need to go do some maths based on rental yields and you will find that what your suggesting isnt plausible.

Treehouse72

D3PO wrote: »

this is pretty much a contradiction. your numbers dont add up. 40% drop in prices and rent near the bottom ?

you need to go do some maths based on rental yields and you will find that what your suggesting isnt plausible.

Wow. It's some trick for such a short post to display both numerical and linguistic illiteracy. But here it is, in all its moronic glory.

Here's a fun little experiment in randomness D3PO. I am now going to open MyHome.ie and pick the very first property listed in Search > Dublin 2. (If you would like to give me any other postcode in Ireland I'll do the exact same experiment). So let's see what we get....

....ah, here we go. The first listing is a 2 bed apartment on Hanover Quay, Dublin 2 on at €650,000:

http://www.myhome.ie/residential/brochure/98-hanover-dock-grand-canal-square-dublin-2/178198

And here is a direct comparison for rent: a 2-bed in the same complex on at €1,900 per month:

http://www.myhome.ie/lettings/brochure/hanover-dock-docklands-dublin/193714

In order for this rental property to give us a gross yield of 5%, it should be priced at €418,000. Hey! What do you know....that 35% above current asking! What a surprise! Who'd have thought?

And just to let you know, that is a 5% GROSS yield. In other words, pretty much a losing investment. Also, I have allowed that you'd get the entire €1900 pm, which is frankly laughable in the current environment. Not to mention I haven't allowed a penny for insurance, maintenance or management fees. So 35% is at the seriously optimistic end of guesstimations.

If you would like to randomly chose any property in the country, I'll do the same calc and more often than not, you'll get exactly the same result: selling prices are 30% - 40% above where the yield suggests they should be.

So there was nothing implausible in what I said: rents are approaching a sustainable level, selling prices are 30% - 40% too high. It is you who is hopelessly muddled and floundering around in the dark with no real conception what the hell is going on.

Victor

D3PO wrote: »

this is pretty much a contradiction. your numbers dont add up. 40% drop in prices and rent near the bottom ?

you need to go do some maths based on rental yields and you will find that what your suggesting isnt plausible.

If rent / value / income is fixed and interest rates are going to rise, house prices need to fall.

The_Conductor

Treehouse72 wrote: »

Rents are much closer to being at the bottom now, notwithstanding dramatic changes to rent supplement rates.

Your caveat explains the current situation in a nutshell. At present, rents are determined by the prevailing rent supplement rates for particular areas/accommodation types- nothing more, nothing less. There is a direct correlation. While there was muttering and moaning when the allowance was lowered last year- rents fell almost in direct proportion to the fall in allowance (and in some cases by slightly more than the fall in the allowance). The government has already signalled another budget cut of some 3.8 billion come this December- no one likes to have their ducks lined up in a row- but its a reasonable assumption that rent allowance is going to be one casualty.

greenasgrass

Pretty Good Point Treehouse.

Maybe I'm better selling now and being left with a small mortgate which I can pay off over the next 2-3 years.

Anyone want to buy a house???!!!!

Treehouse72

greenasgrass wrote: »

Pretty Good Point Treehouse.

Maybe I'm better selling now and being left with a small mortgate which I can pay off over the next 2-3 years.

Anyone want to buy a house???!!!!

Greengrass, I'm just some dude on the internet - please don't make any life changing decisions using my logic!

However, I will say I believe very strongly in what I said above. Notice that poster D3PO, who after insulting me and being shown to be wrong, totally disappeared....I don't say this to be narcissistic, I say it because IMO it shows how utterly clueless people in this country still are about all this. The poster didn't even realise that rents can be approaching normailty whilst sale prices are still out of whack. I guess he/she thought they were the same thing or something. People still don't get it and laugh when even the simplest maths shows that prices are still way too high. It's as though people can't intellectually or emotionally process the scale of the falls.

By the way, does my theorem - yields suggesting prices are 30-40% too high - work for your property?

littleredspot

There's some very well made points in this thread

smccarrick wrote: »

.....they are phasing this out altogether ....... Its supposed to be gone by 2015 for BTL owners.....

Just wondering what your source for this is?

The_Conductor

littleredspot wrote: »

There's some very well made points in this thread



Just wondering what your source for this is?

It dates back to comments made by the Minister for Finance to reporters after he introduced the 2009 Finance Bill- and has been discussed in detail elsewhere- including here.

Subsequent internal discussion documents discussed the abolition of Mortgage Interest Relief for owner occupiers, and the effects of the previous abolition of Mortgage Interest as an allowable expense for landlords (after the first Bacon Report) was analysed in the ESRI report commissioned for the DoF.

It would be helpful if someone stood up and actually publicly said what government policy is for the Irish housing market- and more pertinently, how they hope to get there. This would allow reasonable debate and input from people who have the intelligence to forecast the reprecussions of the different proposed courses of action.

At present it appears that official policy is to continue to allow the Irish property market to depreciate over the next 7-8 years (by manipulating TRS relief for owner occupiers, and Mortgage Interest as an allowable deduction for landlords)- however in the absence of an official statement- despite the numerous commissioned reports, and comments leaked by Department officials (including the Minister himself), its speculation- and any U-Turns are deniable by the politicians......

There is a large element of firefighting here- how much money can be bled from the sector at present- without thinking about the reprecussions of impoverishing homeowners. The EUR200 property tax on second homes- and the proposed residential rates and water metering- is only going to totally throw the spanner in the works- and will assist in further downward pressures on prices.

Longterm property probably is a reasonable investment- if you can buy at a good ROI- but you are looking at treasury rate ROIs as being normal- and asset appreciation, if any occurs, as being simply coincidental, nothing more.

littleredspot

Phew, its not set in stone yet then. That would be fairly disastrous for a lot of people and as you say, no help to the market.

smccarrick wrote: »

It would be helpful if someone stood up and actually publicly said what government policy is for the Irish housing market- and more pertinently, how they hope to get there. This would allow reasonable debate and input from people who have the intelligence to forecast the reprecussions of the different proposed courses of action.

It's just not the way things are done on this little island of ours, is it?

greenasgrass

Treehouse72 wrote: »

By the way, does my theorem - yields suggesting prices are 30-40% too high - work for your property?

I guess it does. Current rent (realistic) is €650/month, current house price is about €230k. This gives a yield of about 3%. The house price needs to drop to about €160k (30% drop!) to get a yield of 5%..... I think I'm doing that right?

Treehouse72

^^ Yes that calculation looks spot-on to me greengrass even though my maths suck. I'm glad your example was able to corroborate my theory because it helps make sense of a very confusing picture.

Try this same experiment with just about any property in the country and you'll see a similar pattern. I see it as spookily consistent evidence that the entire market is 30%+ overpriced, which I think in turn backs up the gut feeling many of us have that things still just feel too expensive for our salaries.

BTW, I fully accept that it is reasonable to pay a premium above yield for the intangible benefits of ownership. But even allowing for that, we are still looking at 30% overpricing IMO.

uberwolf

on the original topic, this is a position I will probably find myself in.

Can one avoid declaring the change of position to a bank, whilst declaring it the Revenue?

The_Conductor

uberwolf wrote: »

on the original topic, this is a position I will probably find myself in.

Can one avoid declaring the change of position to a bank, whilst declaring it the Revenue?

As the bank handle your TRS- that would be a resounding 'no'.

uberwolf

smccarrick wrote: »

As the bank handle your TRS- that would be a resounding 'no'.

you make a reasonable point.

RockRock

OP. If you are moving out to rent (rather than buy) another dwelling do you really need to change to a Buy to let mortgage?

I’m in the situation where I’ve owned (mortgage) my home for over 5 years. I may head abroad for a year or two in the near future so this thread is of interest to me as I’d like to rent out my home here during that period.

I fully intend to do all the right stuff…
- with Revenue.. cancel mortgage interest relief, complete tax returns etc;
- register with the PRTB;
- I’m outside the Stamp Duty claw back period;
- I will do right when it comes to selling the place regarding capital gains due for the period of rental. (This point hasn’t been touched on here but it is referred to in the last paragraph of this article…http://archives.tcm.ie/businesspost/2008/06/15/story33646.asp)

But as for changing my mortgage I don’t know if I have to. I’ve read my mortgage document and I can’t see anything to prevent me from legitimately staying on my existing mortgage but renting it out (perhaps contracts differ?). It is my home and I intend to live there again. I won’t be taking out another mortgage on any other property.

I’ll be looking into this in more detail if I do decide to head off but any comments would be really useful from people who have moved out of their mortgaged home to rent elsewehere.

Amhran Nua

smccarrick wrote: »

Current projections are for interest rates to start increasing in Q4 2010, to 'normal' levels possibly taking 24-36 months to reach normalisation.

Germany is teetering on the edge of falling back into recession though, I'd say we'll have a clearer picture by April or May. Rates will almost certainly rise before 2015 however, barring some unprecedented disasters.

greenasgrass

But as for changing my mortgage I don’t know if I have to. I’ve read my mortgage document and I can’t see anything to prevent me from legitimately staying on my existing mortgage but renting it out (perhaps contracts differ?). It is my home and I intend to live there again. I won’t be taking out another mortgage on any other property.

I’ll be looking into this in more detail if I do decide to head off but any comments would be really useful from people who have moved out of their mortgaged home to rent elsewehere.

I haven't talked to the bank direcly yet but it would appear to me that you do have to change your mortgage. I haven't seen anything to the contrary from any research I've done and I can't see any reason why the Bank would leave me on a preferable interest rate when they could make more money from me.

It'd be good if someone from a banking background could give a definite answer on that one though.

Have you any more information on the Stamp Duty Clawback? I haven't factored that one in!

RockRock

Hey Greenasgrass,

As you probably know a first time buyer or a buyer of certain types of new properties is exempt stamp duty (owner occupiers only). As this is an incentive to owner occupiers, if the property is rented out as a whole within a certain period of time after purchase the stamp duty then becomes due ('clawback'). This period used to be 5 years after purchase but has recently been effectively reduced to 2 years. This probably explains it better... http://www.daft.ie/content/stampduty.daft#clawback

Yeah, I'd be interested to know if the mortgage has to be changed if I move out for awhile. I might give a broker a call tomorrow (can't tell you how much I'd love to stay on my tracker if I moved out ).

RockRock.

RockRock

Greenasgrass,

I talked to the Broker that set up my original mortgage re. does mortgage have to change if one decides to move out and rent the property?

I'm delighted to say the Broker said there was no need to change - with my tracker the lender and myself are tied to the ECB rate + 0.9%. That is the only condition and it doesn't matter whether I live there or move out and rent it.

However, the Broker did say that it would perhaps be a different matter if I was on a variable rate mortgage as the lender can vary the rate at will.

Greenasgrass, I'd say you should give a few Mortgage Brokers a call to discuss your situation. Best of luck - fingers crossed!

Hope this is of help,
RockRock.

greenasgrass

Cheers RockRock. Good Stuff.

Have you seen http://www.askaboutmoney.com/showthread.php?p=1003755. Looks like it's different for different lenders. I'm with AIB. I'm nearly afraid to call them!!