FTB getting a BTL mortgage - good idea?

billymadbiker

Hi,
Here is a brief outline of my situation:
I am 38, self employed, no children, living with partner (also SE, same age) & pets!

We are currently renting, the house we rent has a market value of about £250k and we currently pay £650/pm. This also includes use of 2 workshops/sheds. We use one of these each for our respective self-employment. We are detached, in a rural area which is perfect for our jobs.(noise we make plus location to customers etc)

Now, we both do physcial jobs so we are getting to the stage where we have to do some pretty serious thinking about the future.. We have £20k in savings, earn about £40k a year between us (though it can vary).

Neither of us have any form of pension either.

Options we are currently considering are:

1, Take on some more work, increase the size of our deposit and buy a house to live in. In our area, to suit our needs we would be looking at house prices of £180-200k. Moving out of the area would bring the price down to £140/150 but then neither of us would have any work. We would also have to spend more to find a house with outbuildings/double garage/workshop etc or we would have to rent/buy work space as well. We would like to pay off the mortgage in 25yrs and also manage to start some form of savings/pensions at the same time.

2, stay where we are (renting), obviously rent will increase over the years but so will (should) our incomes.
Use our deposit to buy a smaller town property. Ones in our local town (decent flats/terraced houses) are around £120/130k.
The plan for this would be to rent it out. Ideally for the next 25yrs. If we could pay off the mortgage in 20yrs then we should be able to put the last 5yrs rent back into retirement savings and move into it ourselves in 25yrs time.

3, buy a run-down/empty property. If we can find one local. the idea with this is we both have various amounts of unscheduled free time so we could use that time to 'diy' improve the place while still living/working from the rented place. This is going to take a couple of years but might give us the chance to end up with a 'house for life', take a 30yr mortgage and then downsize in 25yrs to a 'retirement' house.

Out of those options number 2 is looking like the most realistic at the moment. Any advice on pitfalls that we have not spotted would be more than welcome though!! Thanks!

kingstreet

You'll need;-

25% deposit
and
the rent to be 125% of the monthly mortgage interest, assuming a rate of 6% per annum.

For example, to buy for £120,000, you need £30k deposit and a £90k mortgage. The rent achievable would need to be £563 per month.

A BTL property needs to be in "readily-lettable" condition, not in need of repair or modernisation.

Finally, many lenders won't lend to those who do not own a property in which they live. Lender choice will be restricted, as a result.

billymadbiker

Thanks!
Why would the rent need to be 125%?
Is that a figure that the mortgage provider would require or is the extra 25% to cover upkeep etc?

£563/pm is a little high. Looking at the sort of places we could buy for £120k, they seem to rent out for £500-550.

At £120k the places we have seen are in tidy condition. obviously there would be the smoke alarms, gas checks and so on to turn it into a rental property.
We have also seen a couple of places for £100-115k that need a bit of work. We have thought about purchasing one and allowing a year to do it up before renting it out. This would improve lender choice but would then obviously need approval from the MP before starting to rent it out in a years time

ACG

Lenders typically say 125% at 6% on interest only. So you can have it on interest only and overpay if you like (subject to the mortgage conditions).

Thats just what lenders request, some say 130-150% - although these are in the minority.

As has also been said, getting a BTL as a first time buyer is quite difficult. There are very few lenders available.

kingstreet

billymadbiker wrote: »

Why would the rent need to be 125%? Is that a figure that the mortgage provider would require?

Yes. They consider it prudent to build in a buffer, so you don't start off paying out more than you get it.

leveller2911

kingstreet wrote: »

Finally, many lenders won't lend to those who do not own a property in which
they live. Lender choice will be restricted, as a result.

When you say "Own" KS do you mean own outright or own as in mortgaged property?.

I only ask because if its "owned" but mortgaged why should this matter?. If its mortgaged to say 95% this means there is little equity so is this judged to be less or a risk as opposed to someone who rents but has savings?.

Thrugelmir

leveller2911 wrote: »

I only ask because if its "owned" but mortgaged why should this matter?. If its mortgaged to say 95% this means there is little equity so is this judged to be less or a risk as opposed to someone who rents but has savings?.

There's no tangible way of securing savings against debts. Whereas a charge over a persons home is.

kingstreet

leveller2911 wrote: »

When you say "Own" KS do you mean own outright or own as in mortgaged property?.

I only ask because if its "owned" but mortgaged why should this matter?. If its mortgaged to say 95% this means there is little equity so is this judged to be less or a risk as opposed to someone who rents but has savings?.

Either owned outright, or owned with a mortgage.

Lenders think those who do not have a home of their own when buying to let may be using the BTL rules to circumvent residential mortgage income/affordability requirements.

http://www.bbc.co.uk/news/business-17353204

leveller2911

Thrugelmir wrote: »

There's no tangible way of securing savings against
debts. Whereas a charge over a persons home is.

If the BTL formed a Ltd company then its not possible for the bank to put a charge on the house they own. Or am I missing something?.

I don't see there being any more risk to lending to a renter who has savings and someone who has a mortgaged property if the above is correct.

dimbo61

With Ltd Company many BTL lenders want 40/50% deposits and history of owning other BTL properties, business plan etc
Not worth setting up Ltd company for one BTL and you still need EQUITY of some sort!!!! either in your own home for second charge or big deposit in BTL

billymadbiker

So what's the rules on renting out a place with a normal mortgage on it then?
We were not thinking of running it as a rental business/source of income, the idea was for it to cover its own costs and be a 'free' retirement home for us in 25yrs time.
It would also be our only mortgage so could it not just be secured on the property if we had a 25%deposit?