Buying second home, owning first home outright, advice.

quarry_men

Hi there,

I have recently paid off the mortgage on my first home in the North West of England, (currently worth roughly £150,000). I rent this property out as I no longer live in the area due to my work commitments being based in London.

My partner and I are currently renting in London but are looking into buying somewhere next year.

I am just trying to do a bit of research on the best way to go about it, I have a few questions that I hope someone here may be able to shed some light on.

Would I be able to secure a mortgage for a property in London against a property I own outright in the North West?

Could the value of the first property effectively be my 'deposit' for the second property in London?

Would the fact that the first property is rented out be an issue? (I would want to continue letting it out).

We are looking at properties in the region of £300,000 in London, so if we were able to use my first property it could act as quite a sizeable deposit.

Any information / advice would be greatly appreciated.

Many Thanks,

Ben

Dave_Ham

Hi Ben,

Pretty sure there is no current offering to use equity as deposit and the product that used to be about was not really competitively priced.

You can raise a buy to let mortgage on current property to raise a 20-25 percent deposit on new place. I say these amounts as it is always cheaper to have the bulk of your mortgage on the residential mortgage.

Best of luck

GMS

You would need to secure cash for the deposit so this could be done by obtaining a Buy to Let mortgage on the current property.

The equity released would then be used for the deposit on the new place.

Rental income would dictate the amount available from the current property. Use a rate of 6% as a guide. Rent would need to be 125% of the mortgage payment based on interest only. So £100,000 would cost £500 per month and require rent of £625 for example. Minimum income is usually 25k but as you are looking at 300k properties I assume this is no issue.

You are looking at a let to buy scenario.

A broker would be of assistance to you in this case.

holly_hobby

As stated, it is improbable that the vendor of your new primary residence would accept a charge (in lieu of deposit), on your currently let property (as the deposit (togther with the advance from the mge lender) actually goes to the Vendor not to the Lender itself !).

The mechanics as suggested by GMS, will be to secure a BTL (equity release) remortgage on your let property - this will be governed by max ltv permitted by the chosen lender (work on 80% as a current landlord), and rental income/mge payments (@ 125%). With hopefully the equity released, being sufficient for your residential deposit needs

If the let property is self funding and on an AST, then ordinarilly the lender providing the finance for your primary residence will usually put that commitment to one side, when determing affordability for the new residential loan on your London residence. (but not all lenders follow this matrix, so this and your income (for those that will inc the mge commitment) will need to be considered as part of the overall placement process).

As suggested, this is a little messy, but will be a relatively easy case for an experienced broker, so I would engage a whole of market broker whom will source suitable providers and products for the 2 mges required and your circs, whilst supporting you throughout the whole application process and beyond.

Hope this helps

Holly

quarry_men

Hey all,

Thanks for the information and advice, I was unaware it would be the case that I will need to obtain a Buy-to-Let to raise cash for the deposit of the second property, but thanks to you, now I do

I am a little disappointed as it sounds much more complex than I had initially hoped, i.e. sourcing and applying for 2 separate mortgages etc

GMS, What do you mean by "Rent would need to be 125% of the mortgage payment based on interest only."

Why Interest only? Would they not want to see that property #1 is ticking itself over inc the full repayment cost of the mortgage?

I currently receive £650 pcm for renting out property #1 - £100,000 mortgage @ 6% would cost me around £651.88 pcm

I am just curious as to why the rent need to be 125% of the 'interest only'

Thanks again, you have all been very helpful.

Ben

Dave_Ham

Most buy to let mortgages are on interest only, as they are investment.

The banks protect themselves with most having the criteria that the rent needs to be 125% of the monthly payment.

This is so they know it can be self financing and does not require on the investor/owner adding money to it each month as they do not check the affordability of the owner; just their credit score, minimum income and the house rental value/property value.

Good luck

quarry_men

Oh god really?

That doesn't appeal to me at all. If I was to do this I would definitely want a repayment buy to let mortgage over a period of around 15 years.

I am assuming that because I own 100% of the property I would qualify for some of the most competitive rates available?

I have been looking around and found some buy to let mortgages for between 4% & 5%

Would this not be a much better option as then at least the property would not only be paying for itself but 15 years it would have also paid the loan off?

I appreciate all the advice,

Thanks,

Ben

Dave_Ham

It may be the better option, you also have to consider the tax implications of the structure of things..

Other things being equal there are some even better deals out there, but many will want experienced landlords, minimum incomes, selective on property type so not always as straightforward as looking at headline rates.

Some of the ones with the lower rates, also come with huge product fees and therefore you may be better off taking a rate which is 1% higher, with a smaller fee.

Good luck

GMS

You can take the mortgage on repayment if you choose. Only the interest element is allowable for tax deduction. You should read up on this and consider the implications.

Amount of borrowing will be determined by the rental income and the lenders tend to use interest only @125% as the figure, hence why I mentioned it.

Rate will not be any more beneficial due to you owning outright. Rate will be determined by how much you borrow.

As Dave says don't just look at rate, A rate which looks great can soon become expensive if a 3.5% arrangement fee is added. For small loans the percentage fee can be beneficial. For larger a fixed fee can work out better even with a higher interest rate.

Also many Buy to Let mortgages are broker only so looking yourself may not give you access to the best deal.

kingstreet

quarry_men wrote: »

If I was to do this I would definitely want a repayment buy to let mortgage

You can have it on repayment. They use interest-only to calculate the rent needed to cover the interest.

Remember, the capital element of the monthly payment cannot be offset against the rental income for tax purposes. You are normally better off reducing/repaying your residential mortgage faster.