can I get a 2nd mortgage on pure equity alone?

happyhero

Hi can somebody advise me a little please, I am interested in buying a property to rent out or sell depending, and I don’t know if it is possible in my circumstances.


I have lived and had a mortgage for my house since 1995 and this is my only property. The house now is worth somewhere under £450,000. I have a mortgage of £73,000 so there is a load of equity. I have always been interested in investing to provide income and after working for 28 years in building services, which took a turn for the worse after contractors took over, I left to try my hand at the investing. I had some money invested after taking up several share schemes while I was in my job, and have slowly managed to increase this but not so I felt that I can take too much income from it. The result is things are tight for me and I cannot get much in benefits because I have more than is permissible in savings/investments, so although I am increasing my investment I feel I would like to get into property as it will give me some regular income plus give me some safety in retirement, i.e. I could sell up.


I share deal within ISA’s, so no tax to worry about, but I don’t think this investing is clear enough or sufficient to be used to help me get a mortgage, i.e. I don’t think it will give a clear enough picture to be classed as an income. I am thinking that I may take some of this money to use as a deposit or to do a property up or maybe even both.


So after all that my question is fairly clear in that what I am wanting to know is could I get a mortgage to buy a place based on my equity in my current home?


Is it still possible, is there a way to get a mortgage based on equity i.e. assuming my place is worth £450,000 and I have only a £73,000 mortgage could I borrow say £250,000 to buy another property as the bank would have protection knowing that they could reposes and get more than enough to cover all borrowings back?


I heard that they were trying to stop that and people would have to show they could afford it from their income, but if I wanted to do this as a business and have no current business then once I was up and running this new property would form my business and provide my income and if this worked I would be interested in getting a second property to rent a year or 2 later but this is where I get a bit lost because after my equity is used up mostly for the first property how do you go about getting a mortgage for the 2nd one? How do people get to the stage where they have about 10 properties rented out with most of them having a mortgage or am I getting it muddled?


I think in answering me it is best to assume I have no income and only equity plus possibly some cash.


Any help would be appreciated as I would like to do something that takes me out of my current situation of looking great on paper but actually having very little to live on each month, yes I know some will say live on the money invested but that won’t last long that way and then I will back in the same situation or more likely worse so I don’t find that a sensible idea, I am trying to improve my quality of life as I head towards retirement, I am currently 53.


Anyway any advice or guidance appreciated.

Annisele

On equity alone, no.

For any kind of mortgage (residential or buy-to-let), the lender is required to show that it's acting responsibly. Lending to somebody who can't afford to pay isn't responsible.

Depending on how much cash you've got, you might be able to get a buy-to-let mortgage secured on the new property. Depending on how much income you really have, you might be able to release some of your equity to fund a deposit on a BTL. (Edit: it's possible a lender might be prepared to lend on a BTL based on the income you'll receive from that property - but you'd need a decent deposit first. You'd also need a decent contingency fund, for tenants from hell / broken boilers / the unexpected).

I'd suggest you go see a broker and see what they say.

Thrugelmir

Have you considered downsizing and realising some equity which you can then invest to provide an income.

happyhero

Thanks, what percentage would you say is a decent deposit, are we talking 20% or bigger? I obviously prefer the smallest deposit possible so that I have money to sort out problems and to spend on getting the property up to scratch. I am very good on properties and so should be able to cope with more than 80% of the work myself which will help financially.

Its too late really to downsize now for us, we have 2 young kids and absolutely love our house so we never want to let this one go, its something I should have done years ago and not got attached to any properties I was living in. I could have bought them in a state and lived in them maybe whilst I did them up and then sold and started again and thus slowly climbed the ladder. I suppose its the same old thing about what we would do different if we had that time again, now I am stuck really with trying to make my equity make it work, looking at it from a lenders point of view I don't understand why they wont just lend when they know the amount is covered by the equity in the property I live in, they can't lose, what am I missing, why should it be awkward to get the loan if the equity is clearly there?

holly_hobby

All residential mortgages are based on affordability ie you have income to cover the mge repayements.

All BTL lenders (unless you are a professional landlord with accounts/SA302) also require you to be in receipt of earned income (even if the BTL mge will be self sufficient rental receipt wise), but some have a minimum income of circa 25k some don't.

Returns from ISAs or other such investments are not a permitted source or income.

So this may well put to bed any mortgaged BTL arrangement you seek.

Neither can you secure a loan on another unit, on the free equity in your current home.

However, if you are aged 55 or over, you will qualify for a lifetime mortgage arrangement, which is not based on income, but on a min age of 55 and property value. You will need to discuss such arrangements, with a qualified and regulated equity release adviser = try Equity Release Council (prev SHIP) and SOLLA for local advisers and more guidance, http://societyoflaterlifeadvisers.co.uk/ ... http://www.equityreleasecouncil.com/home/ - with any lenders selected providing a no negative equity gte.

Such arrangements permit the rolling up of interest (which of course over time will eroded the free equity), but some lenders will permit the payment of monthly interest (wholly or partially) to effectively ringfence the debt, and protect the estate for beneficiaries.

Or, you sell up, free up your equity, pch yourself a smaller property and use some of the residue to pch a 2nd unit to let.

Given you have no earned income, I would take great care in how much of your capital is invested into property, discuss with your adviser adequate diversification within your portfolio, inc making provision for emergency situs, inc those that may present themselves with your rental property (vacant periods/emergency repairs, etc).

Please discuss how you may suitably invest your free capital with an IFA (pref one whom holds Chartered status).

Hope this helps

Holly xx

happyhero

holly_hobby wrote: »

Given you have no earned income, I would take great care in how much of your capital is invested into property, discuss with your adviser adequate diversification within your portfolio, inc making provision for emergency situs, inc those that may present themselves with your rental property (vacant periods/emergency repairs, etc).

Please discuss how you may suitably invest your free capital with an IFA (pref one whom holds Chartered status).

Hope this helps

Holly xx

Cheers Holly all very useful help but can I ask a bit more, what do you mean about taking great care how much of my capital is invested into property, can you elaborate on that bit, do you mean it is risky having too much tied up in property if so why is this bad i.e. I will have my house I live in plus a rented out house which say for example I paid £200,000 for and adding this to my current mortgage it is still only £273,000 on what would be a total property worth of £650,000 plus? I'm not being awkward, I really want to understand what you are saying as it is very helpful. I'm thinking after deposits and work on the property, to keep £10,000 or more spare for any problems but at the same time I am making the assumption that despite some falls in the market that property will eventually go up and that I will have it rented out most of the time and then eventually have the option of selling it to help me in my pension years if I need it at any time or get fed up renting etc.

Also can you elaborate just a little more on the Chartered status and what that means i.e. whats the difference with IFA who are Chartered or not Chartered?

Thrugelmir

happyhero wrote: »

looking at it from a lenders point of view I don't understand why they wont just lend when they know the amount is covered by the equity in the property I live in, they can't lose, what am I missing, why should it be awkward to get the loan if the equity is clearly there?

Mortgage lending is a very low margin business. Debt collection is a very expensive and labour intensive business. So the security isn't the issue. It's the likelihood of default and costs of recovery. In essence the borrower is risking the banks money and taking a punt.

If you want to use the equity in the property then it's up to you to release it.

holly_hobby

If you invest all your capital into 1 asset class such as property, you are overexposed in one single area - ie if there is a propery market crash you've nothing to balance the loss.

Property can also be a pretty ill-liquid asset depending upon the market and also the sum you are trying to achieve - which is again why you want diversification and capital in differing mediums and access vehicles across your porfolio, especially where you have limited income coming in to recoup/cover drops in capital worth - as a decent broker will also advise and guide on which meet requirements, aspirations and your ATR.

Chartered advisers hold the highest and most comprehensive industry qualification status - which will include tax and investment, so you can be sure that they are fully conversant with such business, which again I feel is important given your regular income situ.

Just following on from Thurls. above post - the main reason why a mortgage loan can't be based on a charge placed on free equity in another unit, is actually that there is a regulatory requirement for the lender to be able to demonstrate responsible lending and that you are able to service the mortgage from income.

Hope this helps

Holly