2bed flat owner - mortgage paid off -- options?

mrell

Hi

I am in a position where I own a 2 bed ground floor flat. I have a wife and 2 kids, both under 3years old.

The mortgage on this flat is totally paid off.

My wife looks after the kids and does not work.

I am the sole salary earner.

My flat has been evaluated between £190-200k. Realisitcally tho, looking at equivalent and past sales, £185-£190k is a realistic sale offer.

3 Bed houses which i would love to move into... are £250k range and upwards... £230k for a minimum modest/compact sized house.

My thoughts are these 2 options...

1) save up or take out a mortgage of approx £70k to start hunting for a 3 bed house

2) remortgage about £50k of my flat. Put that towards deposit for a house. Rent out the flat which equates to £900pcm for my flat. Ultimately rent out my flat until the £50k is paid off as well as pay mortage on the new 3 bed house.

I am very ROUGHLY working out the sums... but if say paying back the £50k i took out agaisnt the flat is say £300pcm and the mortgage payments to pay back on a house worth £250k are say £600pcm, i'd assume the rent from the £900pcm from the flat would cover, all if not most of my costs?

any thoughts guys? All advice appreciated... thanks

somethingcorporate

You'd pay tax on your rental profits, you've not factored that into you calculations, nor all the other costs of being a professional landlord and running a business (which is what you are proposing).

Additionally, £600pm for a £200k mortgage? a £200k mortgage on 3% (which is a fantastically low rate and will not last over the life of your mortgage) over 25 years is £950 per month on a repayment basis. You're looking more like £1k per month for a £200k+ mortgage.

I think you need to redo your calculations.

mrell

somethingcorporate wrote: »

You'd pay tax on your rental profits, you've not factored that into you calculations, nor all the other costs of being a professional landlord and running a business (which is what you are proposing).

Additionally, £600pm for a £200k mortgage? a £200k mortgage on 3% (which is a fantastically low rate and will not last over the life of your mortgage) over 25 years is £950 per month on a repayment basis. You're looking more like £1k per month for a £200k+ mortgage.

I think you need to redo your calculations.

thanks for ur brutally cutting response... there were 2 options, any opinions on option 1 and maybe who to go with?

sharp910sh

mrell wrote: »

thanks for ur brutally cutting response... there were 2 options, any opinions on option 1 and maybe who to go with?

Option 1 is the best. You will not be able to get a mortage for 250k+ for 600pm more like 1k+.

I_have_spoken

Debt has never been cheaper to service, but savings rates are cr*p.

All things being equal, I'd take out a fixed-rate mortgage which isn't too much of a burden to service and sell-up to buy the worst 3-bed in the best street and put some time and released capital into a refurb. You could be there a while, once the kiddies start school etc.

Of course, local market will dictate if 3-beds are moving up or sideways in price and how readily your flat will sell.

Also, while being a LL is a hassle, you should think about whether your pension is adequate via work or whether a housing portfolio is something to aim for.

kingstreet

Consider remortgaging the current property onto a let to buy product. This can be done upto 75% of the value of the property, or if lower, the amount supported by the possible rental income.

Use the funds from this to raise a deposit for the new purchase. This will give you a lower mortgage on your new home and hopefully a better rate.

The mortgage on the letting will then attract tax relief, as the interest on it will be an allowable expense, along with maintenance, letting agent, insurance costs etc. (Seek professional advice on tax issues!)

Example - current value £180,000. Maximum LTB mortgage 75% = £135,000. Rental income would need to be £845. If lower, the mortgage amount would have to be scaled back to stay within lender's requirement. Normally, that's rental income must be 125% or more of monthly mortgage interest assuming rate of 6% per annum.

If the rent is £750 per month, the corresponding maximum mortgage amount would be £120,000.

You can take the LTB on interest-only, to keep the cost down, but in doing so, you need to consider an exit strategy, such as the sale of the flat and how/when you can achieve that.

If buying for £250k, you'd then need a mortgage of £120k (ish) and that will be subject to the usual affordability checks.

Be careful to pick a lender for the purchase which will ignore a self-financing let property/mortgage in the background, as if you get one which wants to "tax" your affordability, the plan will come crashing down if you can't evidence your ability to afford both mortgages if you have a tenancy void.

You may be better off putting this plan into the hands of a good whole market broker to get the right lenders and rates for it.

mrell

kingstreet wrote: »

Consider remortgaging the current property onto a let to buy product. This can be done upto 75% of the value of the property, or if lower, the amount supported by the possible rental income.

Use the funds from this to raise a deposit for the new purchase. This will give you a lower mortgage on your new home and hopefully a better rate.

The mortgage on the letting will then attract tax relief, as the interest on it will be an allowable expense, along with maintenance, letting agent, insurance costs etc. (Seek professional advice on tax issues!)

Example - current value £180,000. Maximum LTB mortgage 75% = £135,000. Rental income would need to be £845. If lower, the mortgage amount would have to be scaled back to stay within lender's requirement. Normally, that's rental income must be 125% or more of monthly mortgage interest assuming rate of 6% per annum.

If the rent is £750 per month, the corresponding maximum mortgage amount would be £120,000.

You can take the LTB on interest-only, to keep the cost down, but in doing so, you need to consider an exit strategy, such as the sale of the flat and how/when you can achieve that.

If buying for £250k, you'd then need a mortgage of £120k (ish) and that will be subject to the usual affordability checks.

Be careful to pick a lender for the purchase which will ignore a self-financing let property/mortgage in the background, as if you get one which wants to "tax" your affordability, the plan will come crashing down if you can't evidence your ability to afford both mortgages if you have a tenancy void.

You may be better off putting this plan into the hands of a good whole market broker to get the right lenders and rates for it.

Thanks sir that's more or less the answer I was looking for... Someone that could put things into perspective for me. ...

I'll have to have a good think as to see what is the best long term strategy for me. Thanks all

Dunroamin

Why make life complicated? Sell the flat and put the equity into a family house, taking out a mortgage for the balance.