Borrowing against one property to buy another

Owlish

I'm new to this property lark, so forgive me if I'm asking daft questions, please be gentle with me!

We rent our house as traditionally we couldn't afford to buy a property of the size we needed in the expensive area we live in (in N London). Earlier this year we bought an 1 bed flat for c.£225k as an investment property, with a 25% deposit on a Buy-to-Let (interest only) mortgage. We did extensive work to the flat and this is now let out. The flat has now been valued at £300-325k. We don't want to sell it, as we would like to continue to rent this out.

We are now working towards being able to buy a house in the same area in 1-2 years from now, and will need a sizeable deposit. I know there is some way that we can release funds from our investment property to put towards a deposit but am not sure what the various options would be, if any.... Can anyone suggest how we could go about this and what sort of amount could be released?

Thank you!

somethingcorporate

Assuming the rental figures stack up you should be able to release up to 75% of the value at the next remortgage.

Go and see a decent broker, they have access to more B2L products given the commercial nature of them, plus they will guide you through the process.

Owlish

Thanks somethingcorporate:beer:

A broker definitely sounds like the way ahead, though the reason I'm asking here (rather than talking to a broker now) is that we're trying to work this out about a year before we are ready to move, so we know what we need to achieve to gather enough money for a deposit.

So assuming £300k minimum value, can anyone give me an 'idiot's guide' to getting 75% of this out as equity to use on a different property? I'm not sure how it works at all with the remortgage / new mortgage.....?

00ec25

Owlish wrote: »

So assuming £300k minimum value, can anyone give me an 'idiot's guide' to getting 75% of this out as equity to use on a different property? I'm not sure how it works at all with the remortgage / new mortgage.....?

you can't get 75% of 300k as cash

assuming the lender accepts a 300k value (they may agree a higher or lower value!), a BTL product (which is all you can get) needs typically a 25% deposit so the max you could borrow would be 225

you already owe (225-25%) = 168.75 on the first BTL so the maximum increase you would be able to withdraw as cash is 56,250, ie effectively the increase in value to 300K means you can now get back in cash the deposit you originally put down in the first place.

one small plus from the above, because the property was bought as a BTL in the first place its market value when first let is established, you paid 225 so the amount of borrowings you can go to and still be allowed to offset the interest in full against tax is 225, that is the tax rule - ie capped at market value when first let. So you'd be able to spend 56,250 on buying your own home whilst offsetting the interest charge for that amount against your BTL income tax. This is called "withdrawing your capital" from the rental business.

Owlish

Wow thank you 00ec25 - I had to read that several times with a furrowed brow (!) but I get it, and it makes perfect sense. I really appreciate you taking the time to explain it.

kingstreet

Don't forget the viability of the case is based not only on loan to value, but also on rental income.

Typically a lender will want rental income to be 125% of monthly mortgage payment, assuming an annual rate of 6%.

On a £225k mortgage, you'd need a rental income of £1,406. So, you can borrow 75%, or the mortgage amount which equates to the monthly rental income for the property, whichever is the lower.

For example, if the rental income is £1,200 per month, the corresponding mortgage amount would be;-

£1,200 / 125% = £960 x 12 = £11,520 / 6% = £192,000 mortgage.