Can we rent out our current home while buying another house?

ScotTot · 9 May 2008 at 5:39PM

Dear all,

Last week the plan was to pay off our mortgage in 3 years (longtime MFW lurker!) , spend 2 years saving for a good deposit, then move to the 'dream home in the country'.

Had a chat with my business-minded brother-in-law and he reckons we could do all this now - e.g. borrow deposit from equity, have mortgages on 2 properties but have rent coming in to cover original one - has anyone ever done this, and can you see any pitfalls?

To crunch some numbers:

Current mortgage on property 1 - £55,000
Deposit needed for new £250,000 house - £25,000
so total mortgage on house 1 would be £80,000

Mortgage on house 2 would be £225,000 (eek!) but rent from house 1 would be £750ish (less 15% management company, as we're not very DIY-minded people!)

So what do you think - or is this all a cunning plot by b-i-l so that we actually have off-street parking and a double spare room?

Away in the hinterlands all weekend, so thanks in advance for any advice! Hope you all have a nice weekend!

clutton_2 · 9 May 2008 at 7:34PM

if you approach a lender for a BTL mortgage - you will only be allowed to borrow such that the rent = 130% of the mortgage repayments - on your £750pcm rent and £225k mortgage - thats impossible

Angelboots · 9 May 2008 at 8:26PM

Im doing this myself, i released the equity on my flat and used it as a deposit for my new three bed house. The best move i've made, i didn't take more than £25,000 so that i didnt have to pay back ridiculos penalty charges if i decided to pay it back early.

The mortgage on my current flat was changed by my lender from a residential mortageg to a buy to let one (they charged me an exrta 1% Apr) to do this.

I had to be sneeky though and get a mortgage in principal on the new house first, stating that i only wanted to borrow 85% of the property value.

Then i released the equity from my flat; i had to do it this way round so that the muliples for my three bed mortage would'nt be reduced if they saw that i had taken money from my flat.

Thankfully the purchase of my new hosue went well, and my three bed lender never found out a thing.

I rent my flat out privately though (advertised it on gumtree so i have more money in my pocket.

I have british gas homecare 400 and a cover for all my kitchen appliances so if anything goes wrong with the house or the electricals in it, then i am fully covered.

Let us know how you get on.

K

chappers · 9 May 2008 at 8:46PM

clutton wrote: »

if you approach a lender for a BTL mortgage - you will only be allowed to borrow such that the rent = 130% of the mortgage repayments - on your £750pcm rent and £225k mortgage - thats impossible

Not necessarily if you take 10% deposit from house one and your income allows the £225K mortgage for house 2 (somewhere between £50 and £70K )then you should be ok as the BTL mortgage would only be the £80K which with a £750pcm income shouild be fine, provided the £80K mortgage fell into the correct LTV(75-80%)

Ian_Griffiths_Halifax · 9 May 2008 at 9:17PM

What's the value of your current house?

real1314 · 10 May 2008 at 7:04AM

OP is away for the weekend so we won't know the value, but I'd guess, based on the rental figure, at £150k?

In which case it might make more sense to have a higher mortgage on P1 to allow a bigger deposit on P2.

OP is looking at £225k mortgage on P2, so I'm assuming that is affordable to them. Overall the total mortgage needed looks to be £305k on 2 properties wroth an estimated £400k, so it's just oer 75% LTV. If they went 75% on P1, taking £112,500 on that, they would have £57500 for P2 meaning they could go with 77% LTV on that one. If P1 is valued at more than £150k, they could probably get both down to 75% LTV (a value of £157k would do it).

However! For tax and "business" purposes they should approach the deal as if they would just sell P1 and buy P2. P1 gives £95k equity resulting in a mortgage of £155k on P2.

Therefore by turning P1 into a BTL they are taking on an extra £150k of mortgage and should therefore claim the interest on the full £150k as an expense against the rental income. They should get specialist advice (if needed) to do this, but it does make sense when looking at minimising any tax liability.

hedger · 10 May 2008 at 8:28AM

I was thinking of doing a similar thing but I believe now it is far too risky in todays climate. If both properties fall in value then a lot of money will be lost. If theres a problem getting P1 rented then youve also a big problem covering 2 x mortgages

ScotTot · 12 May 2008 at 9:43AM

A lot of good advice there - I think we really need to talk this over with a financial adviser. P1 was valued at 195K last Autumn but probably can take at least 10K off that now! Big student and young professional area of terraced housing, so there's definitely a rental market out there.

ScotTot

real1314 · 12 May 2008 at 12:37PM

Your annual rental income after fees would be about £7650 which is a return of 4.14% based on a value of £185k.

P1 has equity of £130k, so you could sell it and buy the new one with just a £120k mortgage.

If you keep P1 to let out, you'd need an extra £185k mortgage, which would cost over £12,200 a year extra in interest alone. Effectively you'd be losing £4550 a year to keep hold of P1 before any other costs, like gas checks, repairs, insurance, voids etc. Insurance and gas checks would be over £300 a year for a start, so you're probably looking at £5k a year in losses.

A non starter imho.

3under3 · 12 May 2008 at 2:15PM

HI,

Yes we did this, borrowed equity from the first flat to use as a deposit on our bungalow and got permission from the original lender to let the flat. Unfortunately the plan backfired on us as due to a change in circumstances we now would like to sell the original flat and we are having to pay two mortgages as we can't sell with tenants and the flat is falling in value every day! We originally intended to keep the flat as our pension and fund the repayment part of the mortgage ourselves. Not sure what we should do now!! Tread carefully is my advice...

Can we rent out our current home while buying another house?

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