Mortgages - buying and then letting out the property?

monkey_writer

Hello everyone,

We are thinking of buying a property in an area we want to move to in 3 years time. We want to buy now as we suspect if when we are ready to move there we will find ourselves priced out of the market.

So we are thinking of buying to let. We have just enough deposit saved for a small property but not quite enough for a larger property that would be better value for money in terms of monthly rental income per £s of purchace price.

One of the estate agents suggested we buy the property with a normal mortgage, live in it for a couple of months, and then apply to change to a buy to let mortgage. If we did this they wouldn't ask us for such a large deposit and we would be able to afford it.

So I have two questions -

A) Does anyone have any experience of this? Would this work - would they ask for a smaller than 15% deposit upon changing mortgage? Would the fees for changing mortgages be very expensive?

If we were to stick with the original (normal buy to live) mortgage, but moved out after a few months and let the property out, what would the mortgage company do (- assuming we had the correct insurance and continued to pay the mortgage fully and promptly)? What could be the legal implications of this?

I hope someone out there can advise us on this as we are desperate to get on the property ladder and have found our dream location!

Thanks in advance!

stanmoresaver

There are lenders that will accomodate this situation.

I would suggest talking to a broker regarding this, rather than applying for a mortgage on a less than honest basis.

Oh- And I wouldn't take tha advice of an Estate Agent for your mortgage, unless of course he is FPC, MAQ/CeMAP qualified and holds PII for mortgage activities.

SS

AndrewSmith

Completely agree with SS.

Lenders have criteria for a reason, not just to be akward. They ask for a 15% deposit to protect their interest (85%) in the property, so will want adequate protection that you have something to lose as well.

The Estate Agent is completely wrong, if you apply for a residential mortgage then decide to let the property out (remember you must inform the lender of your decision to do this as they own the largest percentage of the property, and you will need to change your insurance) the lender reserves the right to amend or increase your interest rate to reflect a but to let scenario. Some lenders may even charge you for the pleasure of this.

Remember that applying for a residential mortgage with the intention of letting the property out is classed as mortgage fraud.

If you do not have a large enough deposit for buy to let, then don't do it as in today's proerty enviroment you would be unlikely to make the property pay for itself without at least a 15% deposit.

Andy

monkey_writer

Thank you SS and AS,

We are weighing up our options - we want to go into this honestly, but are prepared to work the system if we have to.

If it comes to it, we are prepared to be in the situation where we have to top up the rent by, say, £50 per month, because we firmly believe that it will be worth it in the long term - to get a footing in a property that we want to live in eventually - and as we believe the increase in value of the property will far outweigh this small loss. -- If we top up the income by £600 a year for two years before moving in, that's a loss of £1200; but, following our research, we expect the value to increase by as much as £100'000 in 5 years, so it will be worth it.

Q. We have an okay, steady, reliable income - would any mortgage providers take this into consideration and offer us a buy to let with a smaller % deposit?

herbiesjp

You could look at smaller deposits, but still in double figures.

The most importnat factoe for BTLs is that the expected rental incoem has to support the loan via the lenders rental calculation - so it all depends on the figures involved

silvercar

A friend did what your doing. He couldn't get a BTL mortgage as he lived in his GFs house and had no property in his name/ was self employed/ age 50+ / the rent to loan ratio was wrong etc.

He bought a 2 bed maisonette on an ordinary (90%) mortgage, lived in it for 3 months, then phoned his mortgage company and told them he was moving back in with his girlfriend. All totally true statements.
They agreed to him letting out the property, but did add 1% to the mortgage rate.

Bermuda_John

I have a friend who is doing "rent to buy", because he doesnt have a big deposit but can get on the housing ladder and protect himself against big housing increases and to a lesser extent big decreases.

i think they basically agreed a price for a house in the future ,in 3 years time, and paid a deposit equal to 5% of the property to the owner/investor/company (not sure). They then live in the property paying rent to the owner, some of which held back buy the owner and is applied to the final price. They could set the % of the contribution to what they wanted but they went for an affordable monthly rent.

They plan to save while doing this scheme, the terms appear favourable but if they decide not to move in at the end of the term they lose the deposit.


cost : 100,000
price in 3 years: 120000
Deposit 5,000

Rent is something like 650 a month with 100 each month coming of the price.

In 3 years time the price to finance will be:

120,000 purchase price
-5,000 deposit
-3,600 rent contribution

111,400 to finance in 3 years time.

They will then have to find a 15% deposit for traditional financing but they hope to have saved while renting the house out for 3 years. The plan is for them to save around 500 a month so they have 18,000 to put down in 3 years time.

They tell me this sort of deal is all the rage in America, i said they should just rent a cheap place and save the cash but he liked the added protection against any moves in the housing market as nobody is sure whether the crash will come or the prices will increase steadily. Also inflation is eroding the debt as well.

Anybody else heard of this sort of deal or has my mate been had?

nmiah786

monkey_writer wrote:

If we top up the income by £600 a year for two years before moving in, that's a loss of £1200; but, following our research, we expect the value to increase by as much as £100'000 in 5 years, so it will be worth it.

Hate to say this but WHERE IS KENNY AND CO!?!? :eek:

Anyway, I would agree with what the above posters are saying, please do take their advice on board as you do not want to be convicted of Mortgage Fraud and spend time in HMP properties?!

On a practical note, I know of several people who have bought properties and subsequently due to circumstances such as change of job or relationships moved out and rented the property. They tell me that the lenders are generally ok about as long as they are getting their monthly payments But some do tend to increase the interest rate by 1% or even more.....so beware!!!

All the best with your choice but do get some professional advice before you proceed!!!

monkey_writer

Thanks Herbiesjp - do you know of any BTL mortgages that will accept less than 15% deposit?

Nmiah - who is Kenny & Co?

nmiah786

monkey_writer wrote:

Thanks Herbiesjp - do you know of any BTL mortgages that will accept less than 15% deposit?

Nmiah - who is Kenny & Co?

Sorry for that, it was a personal joke aimed at a few people who I have had heated discussions about on the House Buying & Selling section.

They are of the opinion that House Price Increase are not likely to happen in the next few years. Apologies for bringing it up on your thread but I could not stop myself.

meanmachine_2

Wow, an area of the country that is guaranteed to increase by 100K in three years. In fact, increase so much that people who don't buy now won't be able to buy ever again and will be forever more priced out.

I think I know this area...it's called Cloud Cuckoo Land.

No seriously, tell us the general area and I'll be happy to argue with you why it's *unlikely* to rise to such a degree that you won't be able to buy there.

Wow. Landlords happy to subsidise tenants. A brilliant business plan me thinks Baldrick!!

I honestly can't see how you could possibly lose. House prices only ever go up. Well, since 1995 anyway. Before that year, mmm, do you know, my memory starts getting cloudy. Something happened before then...