Buying or mortgage?

Soloistas

Hi MSEs

I am a newbie and I am interested in getting a good overview on this topic.

Recently my father passed away and I inherited some money which is enough to buy a house outright and have a small amount left (about £5k).

I found a property I liked and applied for a mortgage at 70% LTV. My original plan was to use the rest to buy an apartment and then rent it out and using the majority of the income to pay off my mortgage.

Then I started reading up about maximising return through gearing but I wouldn't be entitled to borrow more than £80k on a mortgage due to my earnings (I have just graduated and got a job so I am at the bottom of the career ladder).

I would like to potentially BTL in the future but I am not sure if I am ready right now - inexperience, starting out my career and average salary etc. So I was wondering whether you think buying outright is a good option instead of accepting the mortgage offer (they sent a surveyor out recently and everything went well so I am guessing I will get one)

My logic is: buy outright and save what I would be spending on a mortgage for 5 years. This would give me about £39k in 5 years and then use this as a deposit on a BTL mortgage. This way I would save interest and be a bit more experienced.

Also I am guessing I could even apply for an equity loan to fund another deposit on another BTL mortgage and even have a couple of properties rented out - but not sure if this is playing with fire.

What do you guys think? Have any of you bought outright before or decided not to because of other reasons? And do you think my idea (buy to save on interest and wait a few more years before BTL) is a viable option or am I just being stupid putting all my money into one property?

I appreciate all your comments and if you need any more information I would gladly provide with the mortgage offer coming in I need to get a few more perspectives (as I am fairly naive and inexperienced)

DT91

You have several options,

First option would be as you said to buy outright so as you said you make a huge saving on mortgage interest, this may not be the most lucrative option but it is definatley the safest. It will also allow you more time to research being a landlord. In a year or two when u have saved up money from interest you can use that as a downpayment on a BTL, there are some good 80% LTV deals out at moment, and then you can release equity in your own home to buy a second BTL.

The Second option which would be to split the money and put into 2 properties is the more risky option, but it is what i have done. It is a long game but will allow you more security in the future, there is a few things that you need to read up on, and also deciding the type of property you want, smaller units provide better yields but usually have a higher tennant turnover, whereas a house will have lower yield but alot less void periods. Also if you purchase a BTL that needs refurbishment you can also use the increase in value to release equity to buy your third property depending on what your ultimate goal is. The most important thing with this option will be to leave a good amount of money in the bank to cover your void periods and any unexpected expenses.

Soloistas

Thank you for your reply DT91

What you say is definitely what I had in mind and like I said I do want to get into BTL but I feel that right now I am not fully informed about everything to do with being a landlord and I might be better off just sitting back a couple of years and doing some research.

Out of interest, did you already know quite a lot about BTL before you decided to split your money into 2 properties? Originally I was thinking about getting an apartment and renting that out to pay my mortgage but then I found out management fees would be £60 per month, then tax on the income would lower the net yield to like 4%. Considering I would be paying like 3% interest on my own mortgage it would leave me with a 1% net interest gain (the same as a simple savings account). By buying the house instead of mortgaging it, I would be saving and thus gaining 3%

Also with a BTL mortgage does it work like a standard mortgage? By that I mean you are entitled to a certain amount based on your income? Or does it work differently? Because if you are renting it out, isn't this increasing your income which should allow you to borrow even more?

Thanks in advance!

DT91

I started with a tiny amount of savings and bought a property needing refurbishment used the equity to purchase another one and so on, but my mortgages have stayed at about half of the rental income. Depending on the type of flat depends on management chares, where i live there are some flats with £1200 a year management and some with next to nothing, one of my properties has a £300 a year management and the other i jus pay £10 a year ground rent and management is split between flats when it is carried out. So just under half of my rent is technically profit but it is a slow game to reduce the debt.

I have just read up and learnt stuff about mortgages and property as it is something that interests me, i have been a landlord since i was 19 so had to pick up stuff quickly! It isnt too complicated as i have a management company looking after it for me, they take 8% + VAT of the rental income which i see as a small price to pay. It also means i can then focus on my main aim of increasing my portfolio.

BTL mortgages most of the criteria is that the rental income is 125% of the mortgage eg 400per month mortgage 500 per month rental income. You also need to have the correct LTV which i think at the moment is a max of 85% although you wouldnt want one of those you would want to be looking nearer to the 75% LTV rates, i have just taken out on 80% LTV a 4.48% 2 year fixed, which isnt great but another stupid criteria is that you need to be over 25 on most buy to let mortgages.

If i had enough cash to buy a flat outright, which here would be about 100,000 for a 1 bedroom i would probably split it into 4 properties that need refurbishment. The rental income would then be £2000 after fees per month and mortgage of about £1200 (judging by what i currently recieve). There would be less tax payable as you can offset mortgage interest, you can use the refurbishment costs as a tax loss. You would have the equity in your properties which you could keep or remove and put into 4 more. It is high risk buy the £1200 a month would soon build up in the bank and that would then cover any voids or unexpected costs.

DT91

Slight typo in my last post, it wouldnt be £1200 a month building up in your account it would be £800. Do you have a rightmove link to the property your interested in?

browneyedbazzi

I think starting a new career, being weighed down by mortgages and the stress/hassle of being a landlord is an awful lot for a person to take on at once.

Also, why would you pay interest when you don't have to?

I'd buy the house outright and save what you would have paid on the mortgage for a few years then look into getting a BTL property (if that's still what you want to do)....hopefully by that point you'll be more established in your career and have the time/energy needed to do BTL properly.

Soloistas

Wow! You started at 19? I admire your entrepreneurship. Wish I had been interested in the property market sooner!

So with BTL how do you put in a case for the mortgage? Say you have 20% deposit to put down, and apply for BTL, do you just say to the bank you will rent it out at 125% and they give you the mortgage? Or do they look into how much you earn, how much you have on your mortgage etc? Like I said before with my earnings I can only borrow about 80k as I earn 22k per year basic. If I had a mortgage I wouldn't be able to borrow enough to cover a BTL mortgage if they look into how much you have already borrowed on a residential mortgage and how much you are earning.

I assume since you started at 19 that you have probably got quite a few properties in your portfolio. Can I ask, do you have them situated across the UK or do you focus on a specific area?

Also let's say I bought outright to begin with. I can release some equity in a few years and use this to fund a deposit on a BTL property, right? Because not sure how it works but I would essentially be funding a deposit using debt that is using the house as collateral right? Because unless I was to sell the house, and put the proceeds in a bank, that equity is just a piece of paper saying that I owe the bank a certain amount and that if I can't pay it I will have to sell the house to pay it back?

I am just wondering if you can use an equity loan to fund more debt. 100,000 for a 1 bed flat! What would the return be on that?

Soloistas

Thanks for your reply Browneyedbazzi.

That is exactly what I was thinking and I am glad you think it is a sensible idea. I was just concerned that if I put everything into one house it would be a very big risk if the market fell. However it is a house I can see myself living in for a good 5-10 years.

I should be getting a mortgage offer soon and I went through a broker that gets commission from the lender, so I didn't have to pay for the service. Do you think if I was to back out they would charge me because they are not getting anything from the bank?

DT91

Im only 22 currently, only have two properties at the moment, almost had 3 lost out on one in march last year, but i am looking at my third at the moment! 22k is pretty good i am only on 18k at present, and when i first purchased was about 15k. I cant quite remember the process when applying for my BTL but as it was my home previously and was already let when i applied i already has an AST agreement so that was sent to the mortgage company, they do their own research also. They wrote to a few local agents to get the value of it on the rental market. During my application i think it asked for my other mortgages and my montly repayments along with income. BTL mortgages are easier to get than residential but the mortgage company still do quite alot of digging for information as afterall they want to de-risk their investment.

My properties both of them needed full refurbishement, first one cost 64,000, ended up spending about 12,000 on it part of which was a contribuiton to a new roof, market value is now 90-95 and second property cost me 77,000, spent around 3,500 on it and is now worth around the 100 mark. Rent on them is £550 per month which i recieve £497.20 and mortgages are £290 and £300 as i have £150,000 mortgage between the two! This does still leave me with just under £400 per month surplus though due to management fees of only like £400 per year for both properties! The percentage return isnt bad its 7-8% so better than some.

Each property nets me about £200 a month in 'profit' (although this just stays in bank to help cashflow) so with me looking at my 3rd which will bring my total profit to £600 per month. If i paid off my first property it will have taken me about 5 years, and i would only be getting £500 per month 'profit' but 3 years later i potentially have 3 properties with £600 'profit' per month. The downside is i will have £220,000 of debt. But that just proves that debt isnt always a bad thing!

DT91

In response to your last post, i also use a mortgage broker who is free. When i have had deals fall through they have done alot of work on that but dont charge me as i will go back to them when i purchase my next property. They want returning custom and not just a quick fee straight away. Hopefully your broker is the same!

browneyedbazzi

Soloistas wrote: »

Thanks for your reply Browneyedbazzi.

That is exactly what I was thinking and I am glad you think it is a sensible idea. I was just concerned that if I put everything into one house it would be a very big risk if the market fell. However it is a house I can see myself living in for a good 5-10 years.

I should be getting a mortgage offer soon and I went through a broker that gets commission from the lender, so I didn't have to pay for the service. Do you think if I was to back out they would charge me because they are not getting anything from the bank?

TBH, I think it's a bigger risk to take out mortgages on two properties and potentially end up in negative equity while paying interest on the mortgages if the market crashes. What area are you looking to buy in? What's the market like there? If the house you want to buy for yourself is a long-term home then the risk is lower than if you think you'll want to move on in a few years (because markets dip in the short term but do recover with time).

As for paying a fee if you don't accept the mortgage that comes back from the broker - you would only have to pay a fee to the broker if you have signed a contract that says you will have to so check your paperwork.