Advice needed on a large mortgage

Debsy72_2

Hi

I've found this site very informative since I found it a couple of months ago and was wondering if there was anyone who could give some advice on our situation.

We are currently living mortgage-free in an old bungalow with planning to demolish & rebuild that is worth around £225K it is a stopgap for us as we are a bit cramped (5 in a 2 bed place). We have just seem a great house that we hoping to get for around £430K.
The obvious route is to sell up and get a mortgage of about £220K to cover the fees/stamp duty and some cosmetic work. We can easily get this mortgage on my husbands salary of £70K and would be able to afford it if we started on a mixed repayment & interest only basis changing over to fully repayment as his salary increases over the next two years.

However what we would like to do is keep our bungalow and rent it out. How would we be able to do this? Do we need to get a buy-to-let mortgage on the bungalow then use the capital from this to put to the bigger house. How do lenders look at this as we would effectively have a mortgages totalling around £440K which I wouldn't of thought would be allowed given the multiples of salary they use.

I would really appreciate any help and advice.

Thanks in advance.

Ian_W

Hi Debsy & welcome,
Not an expert but in the absence of any - here goes.

People do this all the time, for many it works well but for others it doesn't so do be aware of the risks. Renting property out is a business you need to research it properly beforehand. Have a word with some local estate or letting agents - what is the demand for your type of property, what is the likely rental? Armed with that you can decide whether it will work for you. Don't forget as well as covering the mortgage you'll need to be happy you can get enough rent to cover void periods, gas checks, repairs, redecoration etc, etc. Because of high prices rents in many areas don't cover the mortgage, let alone these other costs and if that's the case with you - reconsider.

A BTL mortgage may be available if the rent would cover circa 120% of your mortgage repayments but normally it's only 85-90% of the valuation of your property. As BTL is based on the rental it doesn't really affect lending multiples on the residential mortgage you'd need for the balance of your house. So you could probably borrow about £200K BTL IO, but the rent would need to be nearly £1100 a month or thereabouts to get that much. Obviously if you can't get that much rent you'll need to borrow less on the BTL and more on the residential property.

If the figures don't stack up, consider the other option but HTH.

Debsy72_2

Would really, really like some advice on my post above

Thanks

MortgageMamma

Hi Debsy.

I cannot give you official advice, as after all this is only an internet forum and we dont know your whole circumstances but here are a few pointers:

1, as IanW rightly says, don't go into this blindly. The first thing to do is get a couple of local letting companies in to give you a rental estimate.

2. Go to the Residential Landlords Association and National Landlords Association websites as you will find a lot of information on there, here are some links you might find useful http://www.rla.org.uk/, http://www.landlords.org.uk/, http://www.landlordzone.co.uk/

3. Get quotations for landlords property insurance, your letting agent fee's (or if you intend to maintain the property yourself, home emergency insurance and your CP12 checks)

4. Contact a whole of market broker for advice. If you intend to raise money for a deposit on your bungalow, give the broker the estimated rental income. There are BTL products available which only require 100% of the rental income to cover the mortgage payment - this will allow you in theory to borrow more than you would if you used a lender who insisted on 125% rental income over mortgage payments.

5, Remember to take some advice re taxation. You must inform the Inland Revenue if you rent out a property. The more of a surplus there is over running costs, the mroe you will be taxed. Your husband is already a higher rate taxpayer so I would suggest you speak to an accountant about this.

6. Dependent upon whether you have surplus rental income on the bungalow or not, and whether you need to use this as income towards to the new mortgage, you may have to look at a let to buy mortgage. This means that your residential lender will be happy to take some of the rental income towards the cost of your new mortgage, and will not deduct your BTL mortgage payments on the bungalow from your husbands income.

7. Dont forget to calculate legal costs and stamp duty

You have a lot of groundwork to do in investigating whether it is viable to let the bungalow or not. Remember when working out the viablility to consider the impact of interest rate rises on both your buy to let mortgage and residential mortgage, you could also end up above the threshold for inheritance tax so that needs to be taken into account. Also, if you let the bungalow and buy the new property, then decide to sell the bungalow in the future then you will may be liable to pay capital gains tax. Remember a buy to let mortgage is not a regulated mortgage product, so you do not have the same level of consumer protection etc as you would with a residential mortgage. This makes choosing the right broker even more important - if the broker gets your buy to let and residential mortgage business. there really should be no need for them to charge you a fee.

This is as much as I can give you at the moment but it should be enough for you to be going on with!

Kind regards

MortgageMamma

UK007BullDog

Ian gave you the bits you need to know.

Basically:

A BTL mortgage on the bungalow is required to release some funds to use towards the new place.

Have you investigated how much rent you could get in its present state of repair? this rent has to cover the interest only mortgage by up to 130%. This mortgage has to self support it so your husbands earnings will not be taken into account. So if the rent you can get is £1300 your monthly mortgage payments cannot be more than £1000 (this is just an example), this will then calculate how much money you can release from the property. But you cannot release more than 85%. Some lenders now only need 100% - 125% rental cover however their interest rates are a lot higher.

A BTL mortgage is also expensive with booking fees of 1.5% or more. Plus the survey and solicitor costs.


Depending on how much you can get from your bungalow this would be your deposit towards your new place.
The lenders go by income multiples as a guide to first find out how much you could possibly get. Then they look at "Affordability", as your husbands income has to support 5 people they might not lend the maximum. So it is vital to get the most out of your bungalows equity.

So the first thing you do is find out how much your property could rent out. Ask a lot of EA's and also keep in mind that they like to up the rental figure. You need to be conservative on the figure.

The other question you have to ask yourself is if you can support 2 mortgages if you do not have a paying tenant or if they live in your property rent free by not paying? You are still responsible for it.

If the figures do not fit you might just have to sell the property. You could advertise the property in the self build house magazines as a lot of people are looking for land they can develop and a place like yours would be perfect for many self builders.

I suggest for you to visit a mortgage broker (whole of market, independent, free fees.....) as there are so many deals out there you will not find on your own on the internet.

You might also want to pull a credit record on yourself and hubby so you can take that along when visiting a broker.

herbiesjp

In simple terms:

1) YOu raise the mortgage against the first property, which you will let out - the maximum loan amount here will be determinded by a valuation for the expected monthly rental income for that property.

2) YOu use these funds now raised from the BTL property as a deposit for the new property.

3) As long as the first property is classed as self financing i.e. rental income payments cover the mortgage payments the lender on the new property will "ignore" this BTL in the background

4) You therefore are in a normal house buying position whereby the lender will base any mortgage on your two incomes

HTH

Debsy72_2

Hi and thank you for all your replies. We have decided not to rent out our bungalow as the rent would not cover the mortgage and there would be a lot of costs involved in making sure boilers etc are up-to-date as it's an old property.
I have another question. We are going to sell and think it will sell fairly quickly so hopefullly the mortgage offer will be through about the same time as getting a buyer so we can proceed with buying the new house. The issue is if it takes a bit longer to sell the bungalow can we get a bridging loan alongside the mortgage (we'd be looking at £210k mortgage & £220K bridging loan on property valuing £650K)? We can prove that we have savings/investments that can cover the repayments of the loan for more than 6mths, although we don't think we'd need it for that long. We don't want to lose the house because of a lengthy chain (the house sellers are going to rented accommodation so no chain that end).
Thanks again for reading.

UK007BullDog

Yes, but go in with eyes wide open. Bridging loans are expensive. I suggest a broker who specialises in bridging loans who charges no or very small fees. Because there are some rip off merchants out there.

When selling make sure the potential buyer is not in a long and complicated chain. You need a quick sale.

MortgageMamma

Hi Debsy

A bridging loan would indeed be possible, however, affordability is still assessed and credit checks, electroal register etc. if you can prove you have the affordability and some back up, such as your investments etc, then bridging is a good option for you in the short term. I would advise against taking it though unless you actually have buyers in hand for your property and you have proof their mortgage is being arranged as bridging can be expensive. One thing I would say, is not to try and organise the bridging yourself. I had a client who insisted on doing this and needed to complete on the 28th December. It all fell apart at the seams on the last working day before xmas when his bridging was declined. I was then left having to work over christmas to quickly swap his mortgage to let to buy, as he had to complete before the end of the year or would lose a £15k builder discount, and I did this without charging a fee needless to say I was not too happy about it. THe moral of the story is, get whoever arranges your mortgage to arrange your bridging too - they have a vested interest in making it all complete so they get paid - therefore things are less likely to go wrong!

herbiesjp

I think that the bridging on that amount of money will work out very expensive for you and should pretty much be used as a last resort

Just another suggestion, and apologies if I have missed it in th thread - but is there any reason why the chain cannot all complete on the same day? Is your purchase already going through on your new property. You say yours will sell quickly, if so, there should be no need for bridging.

Just a thought

HTH