Help - advice wanted on how to finance the purchase of a second property.

Robinhood

Hi,

Please go easy on me, I'm new to this and this is my first post!

I have recently been toying with the idea of buying another house but have no idea of how to go about doing it, let alone if I can actually afford it.

The reason for not actually knowing if I can afford it is that I would need to use the equity tied up in the 1st property, an area I know little about.

Scenario.

Current property value £175,000
Current mortgage £38,000 expires Sept 2019
Monthly mortgage repayment £350, 5 year fixed rate at 5.29% till 30/11/2008.
Rental Income £425/month

The current mortgage mentioned above, started as an interest only mortgage. It was then changed to part repayment and part interest only. Later, around October 2004, it was converted fully to repayment and the term reduced to 15 years. I have kept the endowment policy going, at a cost of £71.52 a month. It is due to mature on the 22nd May 2023. It was originally intended to reach a target growth of £47,500 but is now only forecasted to reach the following.
5% growth £25,500, 7% growth £33,100 and 9% growth £43,400. As of May 2005, the total fund value was £4464.10.
Could this money be better used in another way?

I would not be against letting a room from the second property which would raise an additional £50/week. The biggest stumbling block I can foresee is my measly salary of just over £20,000. Is there any way of freeing up the collateral in the first property or using the first property as security on the second? Any advice welcomed.

Thanks in advance.

brannyrhino_2

You can do a buy to let or let to buy depending on which house you want to live in!

If you do a buy to let you will have to ensure the mortgage payment is covered about 130% by the rental income.

Any mainstream lender will consider this scenario.

You are likely to be able to raise £40000 on your current property from your current lender as a further advance.

Cannot advise on the endowment conundrum but i would go with 5% projection and nothing else.

Mr_helpful

The second prop could be bought as a Buy to Let Rental incomes are more generous these days quite a few want the rent to cover the mortgage (calculated at interest only) by 115% some are even 100%. The problem is raising the deposit as your mortgage probably has redemption penalties so I would ask existing lender for further advance od 15% deposit for new prop and when fixed period ends remortgage for a better rate. Most buy to let only requires you have a notional income 29K is plenty in most cases.

Robinhood

I currently let the 1st property and have the permission of the lender to do so. Should the dream become a reality I plan to live in the 2nd. At the moment I am renting myself as the 1st property is too far to commute from. I could just sell up and buy closer to work but I feel that I would be passing up a good opportunity and would probably never be in the position to do this again.

The cost of buying another property in the area that I'm looking in would be up to £150,000. With my existing mortgage this would total nearly £190,000. With a salary of just over £20,000, a current rental income of £5,100 and a possible additional rental income of £2,600 I am stuck on how to finance the 2nd property as it would result in a mortgage equivalent to over 6.5 times my income!

Thanks for all the advice so far and please keep it coming.

nrsql

Current property value £175,000
Rental Income £425/month - that looks very low.
Second thoughts - very, very low - I would consider selling it.

Should be able to get mortgage of say 80,000.
Current mortgage £38,000 expires Sept 2019
That leaves you with £42,000 to apply to new property.
The cost of buying another property in the area that I'm looking in would be up to £150,000.
That leaves you with a mortgage of 108,000 to fund from your salary (you could probably apply the endowment to it too).

Your fixed rate mortgage is probably a problem but try talking to a broker about it. Sounds very high for a fixed residential mortgage! Maybe port it to your new property.

Personally I feel this would be quite a high risk stratgey - not much leeway but is probably possible to put in place.

herbiesjp

You would defintely look to a let to buy scenario then

The first property is let out. You may have to ask the lender on this property for a further advance, in order to release some of the equity for a deposit on the new property if you do not already have a deposit

The new lender on the new property will "ignore" the property in the background, as long as the rental income cover the mortgage payments (each lender has difference coverage needed)


Therefore they will base you new lending on your salary and ignore the lending in the background on the let out property. This may make it easier to achieve your goal of getting the second property

HTH

Robinhood

Thanks to everyone for all the advice received so far.

Where there is a shortfall between the amount I can borrow and the amount I need is there any way to use the 1st property as security on the 2nd?

Has anybody got any thoughts on the endowment policy I have running on the 1st property but no longer require? Is it best to continue or re-invest the money in some other way?

Would I be best off saving money for a deposit on a 2nd property or overpaying towards the mortgage on the 1st property?

All help gratefully received.

spikypixie

We are interested in a buy to let as an investment for the future.
Do lenders ignore all your other debts provided you can offset the payments with rental income generated? Does it make more sense to borrow against our current property to give us 100% of the £100,000 we will need, or to keep it simple and get the loan on the actual property?

herbiesjp

spikypixie wrote:

We are interested in a buy to let as an investment for the future.
Do lenders ignore all your other debts provided you can offset the payments with rental income generated? Does it make more sense to borrow against our current property to give us 100% of the £100,000 we will need, or to keep it simple and get the loan on the actual property?

No - the rental income offset only the mortgage payment on the BTL. All other debts are taken into account. However a BTL is agreed on the basis of the expected rental income on the new property, and not your own personal income versus your debts as it were.

HTH

Robinhood

spikypixie wrote:

We are interested in a buy to let as an investment for the future.
Do lenders ignore all your other debts provided you can offset the payments with rental income generated? Does it make more sense to borrow against our current property to give us 100% of the £100,000 we will need, or to keep it simple and get the loan on the actual property?

Hi spikypixie,

I believe, from what little research I have already done, that you would be best off having as much or all of the mortgage on the property that you intend to let out. This is for tax purposes. The interest charged on the mortgage can be offset against the rental income. Hope this is of some use to you.

herbiesjp

Robinhood wrote:

Hi spikypixie,

I believe, from what little research I have already done, that you would be best off having as much or all of the mortgage on the property that you intend to let out. This is for tax purposes. The interest charged on the mortgage can be offset against the rental income. Hope this is of some use to you.

It is not the property that allows you to offset the mortgage interest payments, but rather the purpose of the mortgage.

So if you wanted to, you could raise all the funds on your current property, and still take advantage of offseting the interest payments.

HTH