Let my house - buy another

Brandy0

Hi all,

My husband and I have trawled the net for some kind of formula that we could throw our figures into that would give us a good idea of where we stand in terms of trying to buy a second property, but all we seem to find is opinion which of course is great but also not great if you know what I mean!

Does such a formula exist?

We are not maths wizards and between us we have little knowledge of how mortgages work in the BTL field but we believe we must have a 'chance' to do it based on the following:

Current property val: 250k
Remaining mort: 50k
Income Sals: 45k
Income rental: 14k
New house value: 300k
Savings: none

We understand the pitfalls and risks, but not the calculations. We wouldn't necessarilly want to sell it in the future either as we have kids. We got lucky on a scratchcard (it was a birthday gift and we've not played the lottery or anything like it before or since!) a few years ago and put is aside to overpay it into the mortgage, hence the equity (and in hindsight, we'd not have done this...).

What I don't really understand is what happens to the remaining balance on our current mortgage in this process and how much cash we can release from the current house to put down on another (oh, and we would like to use some to sort out some health issues - say £15k). Please help!

Thankyou all
x

holly_hobby

Hi there,

Lots of people do exactly what you're looking at, so don't worry.


Ok, you want to move out of your current home (primary residence), release some equity and let it out. You also wish to purchase a 2nd property which is to be your primary residence, and use the released equity to fund your next pch plus some additional personal issues.

All fine ....

As you want to release equity from the propety you wish to let out, you will need to transfer (remortgage) the property on to a specific Buy To Let mortgage.

As a first time landlord, the maximum LTV will be 75% of the property value, with the rent having to be equal to 125% of the mge payments (which may be on an interest only basis) - ball park interest fig to use will be circa 6%.

Which equates to (est value of) 250k x 75% = £187,500 potential available mge (giving you a max of £137,500 to play with after redeeming the current 50k mge)

Requiring (working on max available figs and interest only) a minimum rental income of £187,500 x 6% x 125% = £1,406.25 per mth. (£16,875 pa)

At the rental income you have quoted of 14k pa - this equates to a max mge of £186,500 (i.e - £186,500 x 6% x 125% = £13,987.75 pa or £1,165.63 pm rental inc reqd) - so you will have max £136,500 free equity to play with i.e 186500 - 50000 = £136,500

Obv, the figs will reduce accordingly, if you seek a lower equity release sum via your BTL remortgage.

Some lenders also require a minimum earned income of 25k (which appears fine in your case) - and there are fee free BTL remortgage deals about. (saving one set of legals if its just a straight remortgage and there is no deed work reqd).

You will need to have the letting on an Assured Shorthold Tenancy (AST) agreement, and I would recommend a contingency fund for periods when it is not tenanted and the likes of emergency repairs/unforseen costs. To which I would also recommend effecting landlords building ins (contents too if affordable to you).

As a novice landlord, you may want to consider also having the let initially managed by a ARLA letting agent (either permanently or until you get the hang of things). Your letting agt, will set up the AST, credit check the applicants, run the day to day management and of course collect and forward the rent (net of their prof fee).

You will have to submit an annual self assessment to HMRC to declare the net (of permitted deductions) rental income for tax purposes. Permitted deductions are such things a mge interest, management and letting fees, essential repairs, etc. (an accountant, tax advisor or even HMRC will assist on guiding you on whats a permissible deduction). If you are married, and especially if one of you are a higher rate tax payer, than apportioning the net rental income on an un-equal basis will assist in mitigating tax = shout if thats the case.

If you sell the property within 3 yrs of vacting it, there will also be no capital gains tax (CGT) on any gain realised on disposal (ie difference between pch price and selling price).

If you sell o/s of the 3 yr period, there will be potential exposure to CGT, which will be mitigated by various reliefs and allowances, such as primary residence relief (in addition to the last 36 mths of ownership), lettings relief, annual unused cgt personal allowance (which may probably reduce any liability to nil unless there is a substantial gain realised).

Sourcing the mge for your new primary residence, if your BTL mge is self sufficient rental wise, won't be too difficult (although some lenders do inc the commitment and income in their affordability, whilst others if self sufficient will simply set aside for their affordability purposes). As its a residential mge on your primary residence, you will also have access to the lenders standard portfolio of products too.

Obv your income and status will have to be sufficient to svc the new residential mge you require, and on 300k pch price and your (joint ?) income, I think you'll be looking at a minimum deposit (with select lenders) of circa 90k - 100k (assuming super clean credit (top score) and no other commitments). The new lender may also want confirmation of an AST on the let property plus confirmation that the lender is aware its being let.

A whole of market mge broker will find this enquiry fairly simple in itself(notwithstanding any status issues there may be), and will not only source both the most suitable BTL and residential mge for you, but support and guide you throughout the application process and beyond.

Hope this helps put some meat on the bones for you .... shout if you need any more guidance

Hope this helps

Holly x

drummer_666

As mentioned above a BTL will only want to lend a max of 75% and will want the rent payments to cover 125-130% of the interest only part of the mortgage.

When you change to BTL take back £115k. You'll still have 54% equity in this house.

Use the £115k for 15k personal, £10k for legal fees and some money to do up etc

= £90k (30%) for deposit on new place

Doing this means you have the bigger equity on the rental house, which will most likely have the highest interest rate.

That's what I'd do anyway.

My percentage figures are all based on the valuations that you gave, but I think you will need to get your current house valued by the BTL mortgage company

holly_hobby

drummer_666 wrote: »

As mentioned above a BTL will only want to lend a max of 75% and will want the rent payments to cover 125-130% of the interest only part of the mortgage.

Rental income at 125% is in relation to the TOTAL mge commitment (interest only or C&I), not just the interest element.

Of course if the mge is wholy interest only, then yes the rental income at 125% only has to cover the interest element, as thats the mge repayment method in any event.

Remainder of the post is alittle confusing, if the OP takes max LTV on the BTL at rental inc of 14k - the remaining free equity is circa 25% nowhere near 54% with £63,500 remaining free equity (slightly more if they can achieve a higher rent up to £16k pa) ....unless I have missed something ?

Or are the figs of 115k in relation to how the equity released will be used

Sorry if I've lost the plot on this, and it stands out a like a sore toe to others !

Both mge applications will require a survey to be conducted on behalf of the lender

Hope this helps

Holly

Brandy0

WOW! Thanks to all posters - Holly in particular - that wasn't just meat on bones - that was skin as well! A friend of mine is an estate agent and manages properties and would do mine for me for 1.5% + VAT (but is encouraging me to manage it myself because he doesn't feel the property needs managing once tennants are in place) but he said that you should never really mix business with pleasure so he's giving me no technical advice whatsoever on the basis that a good decision now could turn bad later (or vice versa) and I might want to kill him. Other than telling me 'it sounds possible', he did tell me I should get professional advice.

I think it was when I asked him what he would do in my position that made him go all funny! His answer was "One man's goose is another man's gander and one man's sugar is another man's sherbert!"

Anyway I will talk this through with my hubby and see what he thinks. Last question - in general, is this a bad time to do such a thing or does it still depend most on your circumstances? thanks again all.

Fire_Fox

Welcome! Consider joining a landlords association and running an advanced search on MSE. Your letting agent friend sounds very sensible, remember as a landlord you cannot delegate your legal responsibilities and obligations to a letting agent anyway - the buck stops with you. Just some of the legislation you need to comply with http://forums.moneysavingexpert.com/showpost.php?p=41160642&postcount=12

Please also consider how you will pay two mortgages if you fall ill or injured and cannot work, redundancy, tenant does not pay rent or trashes the place and it takes months to evict. With an extra income/ asset you do not live in many means tested benefits would be closed to you. Even if the tenant does not pay rent you still have repairing obligations, so if the heating broke down you could still have to spend £1000 fixing it!

holly_hobby

You need to research your market and target audience, demand and potential for continual let - which is your friends realm as they will know the area.

Holly x

kingstreet

holly_hobby wrote: »

Rental income at 125% is in relation to the TOTAL mge commitment (interest only or C&I), not just the interest element.

Of course if the mge is wholy interest only, then yes the rental income at 125% only has to cover the interest element, as thats the mge repayment method in any event

TMW, as an example, take 125% of interest-only even if applicant chooses capital & interest.

I expect the thinking is around the minimum payment in the event of difficulty and IO would be the fall-back position.

holly_hobby

Is that just TMW ?

kingstreet

That was the only one I looked at h, to be honest.

BTL ain't my market, so it's a "wade through the criteria job" if anyone fancies it.

holly_hobby

Thanks Kings. if it is market wide, I will duly stand corrected and accept my rightful punishment .... (no Chablis for a week would do it ... actually it would be torture ... !!)

H x