100% Mortgage backed by equity in BTL property

dereke_2

My family and I moved from our house in London a year ago to Gloucestershire. We had 40% equity in our house and decided to let it so it is now on a BTL mortgage with some very nice tenants. We are getting a good return on this property and do not want to sell it.

We are currently renting as we didn't know exactly what we wanted to do yet but now we have decided we want to buy a house. We don't really have any savings, but we obviously have this big 40% equity in the other house. The options as I see it are to re mortgage (3% early redemption fee + higher interest rate). This was my original plan, but now I see there are now 100% parent backed mortgages and I think this would work out quite well for us. However rather than parent backed, I would like mine to be "my other house backed".

Has anyone ever done anything like this or know a lender who would be open to it? Or are there any options I have not thought about?

Thanks

ViolaLass

So you want to buy a new house with a 100% mortgage backed by your other property, of which 60% is already mortgaged?

What is the let property worth?

HappyMJ

You can have a second mortgage on the let property which should give you enough money for a deposit on the house you want to buy. Or you can borrow the deposit as an unsecured loan if your income is high enough and you can afford to pay back both the loan and the mortgage.

dereke_2

Yes That is right.
The property is worth around £450,000.
I've had one quote for remortgaging the property to take out £80,000 at 3.89%. After double checking my figures this is actually 0.1% less than the current rate we are getting so that is actually pretty good. The bad part is the 3% early repayment charge (3% until Nov, then 2% for the following year).

ViolaLass

if you're not planning to sell, why does the ERC matter?

Thrugelmir

ViolaLass wrote: »

if you're not planning to sell, why does the ERC matter?

Guess it's to switch deal to release the equity.

Gold_bullion

OK, so that's an £8,100 ER fee, dropping to £5,400 in November. Assuming you haven't yet made an offer on the new property, it will probably be November before you complete as we're almost into September now, although maybe quicker as you have no chain. Does £80k give you a decent residential deal deposit on the new property you are considering?

By renting your London house rather than selling it, for up to 3 years you'll benefit from the "own residence" GCT exemption, which could well benefit you by more than £5,400 depending on how much prices rise and how you use your (and your other half's if joint owners) CGT exemptions assuming London prices increase over this period, as they seem to be currently doing.

The "hit" of the ERC has to be balanced by the gain in the equity of the London property (less any CGT). Assuming a 5% growth in the London property price per annum and NIL CGT, that's 71k over three years, which will make a £5,400 ERC look like pretty small beer. Even with say a 40k CGT gain not relieved by personal allowance(s) at 18% that's £7,200 in CGT, so the £71k becomes £64k.

You'd be effectively probably more than doubling your gearing when prices in these areas are rising, thus significantly magnifying your potential return.

Of course prices can always fall as well as rise ... !

Thrugelmir

Gold_bullion wrote: »

Does £80k give you a decent residential deal deposit on the new property you are considering?

New lender will have to be agreeable to the source of deposit being a release of equity.