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Using my current home as collateral on a new home.
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# 1
kjohnk
Old 10-09-2007, 8:00 PM
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Default Using my current home as collateral on a new home.

Here's my dilemma. My home is worth 160K. My mortgage is 27K. I am looking at the possibility of renting it out and using the monthly income (est 650/mth) and the value of that house to enable me to move up the ladder. I am on a good wage (which means nothing in this crazy world of house prices) and are looking at properties in the region of 270K. I am unsure of how and frankly who to approach to get a mortgage. Buy to Let mortgages look to be one option but again, is this the only one?
I think the current home is an asset which I do not want to lose. The thought being that if life does take a turn for the worse I have a home that I can easily return to in order to reduce my living expenses accordingly. Sorry if that sounds a little pessimistic, but my first home was bought in the early 80's and I have no desire to repeat that stage of my life. On top of that its a longer term investment for my dim and hopefully distant retirement.

Thank you in advance for any responses.
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# 2
silvercar
Old 10-09-2007, 8:23 PM
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650 per month on a 160k house yields under 5% and that is before expenses. In my book that is not worth doing but if you insist:

Take a buy-to-let mortgage on your current home, at 650 rental you could probably get a mortgage of 100k. You then want to buy for 270k so, unless you have other savings, you will need a mortgage of just under 200k on your new home. (270 less the 100k mortgage taken on the BTL plus the 27k existing mortgage).
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# 3
kjohnk
Old 10-09-2007, 8:32 PM
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Silvercar - I may have misunderstood you posted reply, but although my current place is worth 160K. The mortgage I have outstanding on it is around the 30K, less in fact. Does this change your figures?
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# 4
PasturesNew
Old 10-09-2007, 8:34 PM
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Yield should be calculated on the current value, not the price you paid for it.
If you flogged the house and banked your 130k you'd get 6% for doing nothing.
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# 5
benood
Old 10-09-2007, 8:37 PM
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If things take a turn for the worse and you need to downsize, having to sell the larger place to reduce your expenses sounds like a potentially bankrupting situation.

You've got plenty of equity in your existing property - you need to consider how big a mortgage you would be comfortable with if "life takes a turn for the worse".

If you sell the existing then you need about a 140k mortgage to buy the new place but if you don't sell you're looking at more than 300k of mortgages. Interest payments will be around 1,500 a month on 300k, if that's affordable then you could consider both.

From what you say I think you might be better off taking the less risky route.
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# 6
macaque
Old 10-09-2007, 8:49 PM
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Quote:
Originally Posted by kjohnk View Post
Here's my dilemma. My home is worth 160K. My mortgage is 27K. I am looking at the possibility of renting it out and using the monthly income (est 650/mth) and the value of that house to enable me to move up the ladder. I am on a good wage (which means nothing in this crazy world of house prices) and are looking at properties in the region of 270K. I am unsure of how and frankly who to approach to get a mortgage. Buy to Let mortgages look to be one option but again, is this the only one?
I think the current home is an asset which I do not want to lose. The thought being that if life does take a turn for the worse I have a home that I can easily return to in order to reduce my living expenses accordingly. Sorry if that sounds a little pessimistic, but my first home was bought in the early 80's and I have no desire to repeat that stage of my life. On top of that its a longer term investment for my dim and hopefully distant retirement.

Thank you in advance for any responses.
Like 10 million other people, you want to speculate on property in the hope that one day your 'property portfolio' will be worth more than it is now. That has worked well for a couple of generations, but many of the drivers behind the price rises (falling interest rates, rising prosperity, rising population) have played themselves out. On the subject of rising population, you should reflect on political realities. Immigration has become a thorny issue and without it, the population will be static.

Over the long run shares have performed better than property. If you have a fetish about getting leveraged, why not borrow some money to buy shares. You can use the dividend income to reduce the interest rate liability.
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# 7
Charis
Old 10-09-2007, 8:52 PM
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At today's interest rates, the 650 a month you hope to get will just about pay the interest on a 2nd mortgage of 125K. If you intend to pay off some of the capital, you will have to choose an even cheaper second property. Your sums assume that you can rent the property continuously and none of your tenants trashes the place, or does a bunk owing rent, as has been known to occur. And also that interest rates don't continue to rise, which they could well do. There are also letting agents' fees to consider. In addition you will have two houses to insure and maintain instead of one.

I don't understand why you hope the value of your current house will 'help you move up the ladder', as you won't be selling it and adding the money to the equation. You will effectively be moving down market until such time as you choose to sell your present home or move back into it. I think you are better off staying where you are unless you want to take the risk of buying a larger house now and increasing your mortgage debt.
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# 8
golddustmedia
Old 11-09-2007, 3:59 PM
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Basically you want to remortgage your current property to release equity.

Then mortgage the new property to be able to purchase it.

Typically if you're not going to occupy the property the bank will only mortgage up to 80% of the value. That would be £128k on your current place. Since you already owe about £30k on it you could potentially release £100k of value from your current home.

The bank would take the monthly payments for that mortgage into consideration when deciding how much you could borrow on the new house.


I've just done similar myself but the way I did it was to not mortgage the place I was renting out and instead took a 100% mortgage on the house, using any capital I had to settle the mortgage on the place for rent.

It's hard work but I now own outright the place that's rented but owe a lot on the house I occupy. This does have the benefit that I do not need to inform the bank about any "buy to let" arrangements since they are not involved with the rental property.
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