Using equity to buy another property

kittycatsam

Hi

My fiance and I have been looking at bigger houses. Currently the house we are in has no mortgage and a value of around 100k. The rental market, particularly for students is extremely good in our area but the house sales not so good. The plan would be to rent our house out for £720 a month approx when averaged over 12 months.

My fiance can get a mortgage for 135k on his own as he was offered this based on wages a few months ago (I won't be on the mortgage yet as I still joint own a house with my ex) but we are looking at around 180k for the new place so need to make up the difference.

Our incomes can cover non rented periods no problem if this ever occurred as we jointly earn just over 3k and have no credit outstanding.

Does anyone know if it's possible to get a bigger mortgage based on potential rents or equity in the first house. Obviously we will see an IFA at some point but I just wanted initial advice if possible.

Thanks!!

VIGILANT22

Yr fiance can release equity (presuming credit file ok)
Max BTL 75%
The surveyor advises lender on rental income potential
Rental Income should be 123/130% of mortgage payments (IO)

kittycatsam

Yes, his credit record is excellent. He has credit cards that he uses a bit each month and pays off to keep the credit record ticking over.

So am I right in thinking he would get a let to buy mortgage on our existing property to cover our shortfall and a seperate 'normal' mortgage for the new property? £720 a month should work out around 150% what the mortgage payments would be on 75k so that should be fine.

I thought that if this is the case we should borrow a high proportion of what we need on the buy to let so that we can claim tax back against the interest although we can check this with an IFA in the next couple of weeks.

Thrugelmir

VIGILANT22 wrote: »

Yr fiance can release equity (presuming credit file ok)
Max BTL 75%
The surveyor advises lender on rental income potential
Rental Income should be 123/130% of mortgage payments (IO)

There is no allowable offset of interest for tax purposes. As the purpose of remortgaging the existing property is not to invest in another investment property.

This will result in a high proportion of the rental income being taxed. Depending on the total income of the OP's fiance may even push into higher rate tax band.

May be better to sell the property and have minimal mortgage on new property.

VIGILANT22

Maybe you will obtain 720 as a rental, however as I stated above it is the surveyor who recommends to the lender what the rental income will be after taking into consideration comparables in the area...........

However you must have a fair idea of rentals in the area...a BTL on IO would be approx 400.00 per month..then any other costs ie rental agency fees etc

Read this for claiming interest on how to get tax relief on main residence as well as investment property....

http://www.hmrc.gov.uk/MANUALS/BIMMANUAL/bim45700.htm

VIGILANT22

http://www.hmrc.gov.uk/MANUALS/BIMMANUAL/bim45700.htm

Mr A owns a flat in central London, which he bought ten years ago for £125,000. He has a mortgage of £80,000 on the property. He has been offered a job in Holland and is moving there to live and work. He intends to come back to the UK at some time. He decides to keep his flat and rent it out while he is away. His London flat now has a market value of £375,000.

The opening balance sheet of his rental business shows:
Mortgage£80,000Property at market value£375,000Capital account£295,000
He renegotiates his mortgage on the flat to convert it to a buy to let mortgage and borrows a further £125,000. He withdraws the £125,000, which he then uses to buy a flat in Rotterdam.

The balance sheet at the end of Year 1 shows:
Mortgage£205,000Property at market value£375,000Capital accountB/F£295,000Less Drawings£125,000C/F £170,000
Although he has withdrawn capital from the business the interest on the mortgage loan is allowable in full because it is funding the transfer of the property to the business at its open market value at the time the business started. The capital account is not overdrawn.

herbiesjp

If you are doing student lets - not all lenders will accept that type of let.

kittycatsam

Ideally we would like to just sell the place but going by performance in the area this could be quite a long slog as there are loads of very similar properties in nearby streets that have been for sale for around up to a year.

The reason we were thinking of student lets was due to the higher rent. For our area the rent is £60 - £65 a week per room excluding bills. There are 3 rooms to rent out. Also, there is a shortage of student accomodation due to the high demands and we live right near the University. Alternatively the rental for a normal let would be around £500 a month. One across the street is being rented for £525.

I don't think we'd be in the higher income bracket, jointly we earn about 50k now. Maximum rent we'd get is under 9k annually.

VIGILANT22

as herbiesjp stated students are not the ideal tenants for many reasons, starting with financing the property, seperate leases etc..too much headache...

Please refer to the hmrc manual i posted..that is where you will find the correct information on tax...it's a subject everyone has an opinion on.....but if you stick with hmrc facts you cant go wrong.......

Thrugelmir

VIGILANT22 wrote: »

http://www.hmrc.gov.uk/MANUALS/BIMMANUAL/bim45700.htm

Mr A owns a flat in central London, which he bought ten years ago for £125,000. He has a mortgage of £80,000 on the property. He has been offered a job in Holland and is moving there to live and work. He intends to come back to the UK at some time. He decides to keep his flat and rent it out while he is away. His London flat now has a market value of £375,000.

The opening balance sheet of his rental business shows:
Mortgage£80,000Property at market value£375,000Capital account£295,000
He renegotiates his mortgage on the flat to convert it to a buy to let mortgage and borrows a further £125,000. He withdraws the £125,000, which he then uses to buy a flat in Rotterdam.

The balance sheet at the end of Year 1 shows:
Mortgage£205,000Property at market value£375,000Capital accountB/F£295,000Less Drawings£125,000C/F £170,000
Although he has withdrawn capital from the business the interest on the mortgage loan is allowable in full because it is funding the transfer of the property to the business at its open market value at the time the business started. The capital account is not overdrawn.

Thanks. I stand corrected. Money withdrawn can be used for any purpose.

VIGILANT22

Thrugelmir wrote: »

Thanks. I stand corrected. Money withdrawn can be used for any purpose.

Thks....so many people are not aware of this..I see this mistake on here constantly...to be fair even some hmrc staff dont even know....:)