Will I have a problem getting a new mortgage, when other place is in negative equity?

TobyGilliam534

I have a Shared Ownership flat in Manchester, and am in negative equity. I own 50% of the flat, which I think is worth about 45-50K. I still have about 70K to pay on the mortgage.

In the meantime, over the last few years I've been making good money contracting in London and am managing to save quite a bit (for the first time ever - it feels good!). The long term plan is to move to London and buy a place there. I'd be looking to buy with my partner - I would think by that stage that our shared income will be about 100K, and that I'll have a deposit of 60-75K (depending on when I do it). I think we'd like to spend something in the region of 375K, so it seems fairly doable.

I'd quite like to hang on to the other flat if possible. Obviously I could try to get myself out of it by selling it, but I have permission to let it out from the Housing Association and the Mortgage company as it's in negative equity. My feeling is that I'd like to hang on to it in the long term till I've at least broken even with it, rather than putting a good chunk of my hard-earned deposit into getting me out of my old flat. From here in I want to make sure I have at least 20-25% deposit for any place I take on, as I did 100% on my original place and now realise how bad an idea that is.

The question is, is there anything that might scupper me from getting a new mortgage in London when my other place is in negative equity (assuming it still is by that point)? My rental covers the mortgage but doesn't quite cover the mortgage + the rental I pay to the HA (probably only down by about 75 quid a month or so).

Any thoughts?

Toby

Dave_Ham

Hi Toby,

This is all feasible, do not worry.

I would be engaging a broker, as this case will not necessarily suit every lender.

I would also be cleverly assessing whether the Housing Association are going to have a longer term appetite to continue to allow it to be rented, as this would have a detrimental effect on the mortgage affordability and overall plan.

Remember to factor in Stamp Duty at 3% above £250k and to be paid upfront to your savings plan.

All the best

Thrugelmir

What rate of interest are you paying on your mortgage?

Trollfever

Do you really want to be a long distance landlord hoping that one day inflation will have taken care of your negative equity?

TobyGilliam534

@Dave - thanks! Could you explain one thing- you said "to be paid upfront to your savings plan." Do you just mean that I'll need to pay it upfront (i.e. that 3% of the total value of the flat will need to be paid upfront out of my deposit pot?).

The HA point is a fair one, especially if they found out I'd bought a new place.

Also how much will it limit me in terms of choice of lenders? One problem with buying SO is that it limited my options of mortgages. Could this mean I end up paying a higher rate of interest as I won't be able to shop around?

@Thrugelmir It's pretty high - about 5.4% as I'm on my company's SVR, and can't move at the moment because of the negative equity (although I'm speaking to them next week about whether we can reduce it).

I realise that it'd be a great use of the money to pay down the 70K mortgage when I've saved that money, but the problem is then I wouldn't have it for the new place, which is really my main ambition at the moment.

@Trollfever I'm not sure I understand your point, I guess that what you're saying is exactly what I'm intending to do. It would either be inflation, or an eventual increase in house prices - I realise this is pretty unlikely to happen for quite a while, but is there any reason not to hang on until they do? Surely it's better than throwing 25K down the toilet now?

Toby

Dave_Ham

Sorry, I worded this badly. Yes 3% is payable upfront for Stamp Duty so ensure you have the deposit/saving plan reflect this.

It will not limit you as much as SO, although will need to be considered as some lenders will just not like it...

Best of luck

Thrugelmir

TobyGilliam534 wrote: »

I realise that it'd be a great use of the money to pay down the 70K mortgage when I've saved that money, but the problem is then I wouldn't have it for the new place, which is really my main ambition at the moment.

Given you don't want to sell the property,

My feeling is that I'd like to hang on to it in the long term till I've at least broken even with it,

. Then the better use of the money would have been to reduce the mortgage instead of leaving the money on deposit.

Letting the property may result in you subsidising the venture further until prices do indeed recover. Only the interest element of your mortgage repayments is offsetable against the rental income. Something to consider when weighing up whether the return is worthwhile.

TobyGilliam534

@Dave - Thank you, I hadn't considered this.

@Thrugelmir Thanks for your thoughts too.

I did consider putting the money into paying down the mortgage, but then surely I would have no deposit for a new place in London? The only way of releasing that money would be to sell the flat, which defeats the object right? Or is there something really obvious I'm missing here? Buying that place is my major ambition and this would seem to then put it out of my reach.

Although it would mean that I'd be making some money out of the flat, probably about 300 pounds a month or so.

I am subsidising it a little, but not very much and this is offset by the fact that I'm paying about 150 quid of the mortgage off per month.

Also, when you say offsettable, do you mean for tax purposes? I've submitted tax returns for the last few years including this and I've never had to pay tax on it.

Toby

Thrugelmir

TobyGilliam534 wrote: »

Also, when you say offsettable, do you mean for tax purposes? I've submitted tax returns for the last few years including this and I've never had to pay tax on it.

The capital element of your mortgage repayment is not tax deductible.