Maths of Buy to Let

littlehobo

Own 1 bed flat valued at 100,000
Mortgage remaining 40,000 (so approx 60,000 equity).

Want to buy 3 bedroom for 230,000

Have around 30,000 in savings (would need to cover legal fees from this)

There are a lot of 1 beds on the market just now and not much selling. There are some flats in our building rented and seem to be occupied most of the time with quick change overs between tennants. Looking online they would be about 550 pcm rentals.

Do we need to sell now to be able to buy, or would the maths stack up for switching to a buy to let (releasing a bit of equity) and buying elsewhere...?

Notmyrealname

You need to look at LET TO BUY, not Buy to Let as you are letting out a property to buy another, not buying one to rent out.

Basically the requirements are:
No more than 75% LTV.
The valued monthly rental must be 125%-130% (depending on lender) of the mortgage monthly interest.
Legal fees are around £3000.

So to meet that LTV you'd be able to take out no more than £35k in the equity to go towards the deposit for the house and it'll need a monthly rental value of around £350pcm.

In short you should end up with around £60,000 (savings plus equity drawn less legal fees for both) to put down as a deposit for the 3 bed thus giving you a 75% LTV mortgage which will give you some good interest rates.

I'd be tempted to have the flat on interest only and draw an income from it. If you go for repayment there'll not be a great amount left over to cover repairs and you'll still have to pay income tax on the rental income the same as the interest only as you can only claim the interest as a tax deductible expense. For example:

Monthly rent: £500

Interest only mortgage: £300/m
Repayment mortgage: £450/m

You'd still pay the same income tax on the £6000 rental income whether it was repayment or interest but there is a £1800 difference between the two in regards to the money you put in your pocket. After stuff like LL insurance and gas safety checks, you've around £700 left from the repayment to cover repairs or a rise in the monthly payments FOR AN ENTIRE YEAR before you're dipping into your wages.