keep old house - new house letting mortgage

mmagenta

Has anyone heard about this kind of mortgage where you keep your old house and rent it out and then this [increase in value]counts towards your mortgage on the new property?

We are looking to move to a bigger house but someone told me this kind of mortgage is available. It sounds a bit dodgy and "endowment mortgage" like to me.. Does anyone know anything about them?

Thanks
MMagenta

wecanhelpu

I think it's known as Let-to-buy. Loads of people have done it. If you time it right you can make a decent profit.

What you need to remember though is if you have a mortgage or need to or need to remortgage to raise a deposit then as well as having 2 houses you will also have 2 mortgages.

silvercar

let-to-buy. basically its buy-to-let on your current home (except you already own it) and then a normal residential mortgage on your new home.

You (normally) increase the mortgage on your current home and change it to a letting one, then use the increase as the deposit on your new home. Result is the mortgage you hopefully intended on your new home and an interest only letting mortgage on your current home that is covered by the rental income you hope to receive.

You just need to remember that you are responsible for 2 mortgage and 2 house to maintain. You really should make sure you have enough spare cash to cover rental voids and problems with the let place.

say your current home is worth £200k and has a mortgage of £50k. You see a new house valued at £300k. You could get a letting mortgage of £150k on your current home (if the rentals stack up), this releases £100k as a deposit on your new home. The downside is that you can never get a 100% mortgage on the rental property and often need to go as low as 75% to ensure the rent covers the mortgage. This leaves equity in your rental home that you presumably were going to use as a bigger deposit on your new home.

Incidentally, you can do exactly the same plan if you intend to sell rather than rent out.

chief518

First post so go easy please

We are in the process of completing what Silvercar has described and it's quite a useful way forward. You gain a BTL house at a price that is suitable for its rental yield given voids/expenses and in addition you become a chain free buyer on the next property.

Being chain free has greatly helped our move process both in terms of bartering and quickness of completion. In fact it has been so beneficial that when we move in the future we may well do the same thing even if it will be rented for 6 months.

The key point though is that it's worked out for us because we can afford to buy our next property with a remortgage that still makes the yield work on the old property. If this wasn't the case then I probably wouldn't have done it.

lypsey

Chief518

I wonder if you could shed some more light please
1) How much was your 1st house and how much is the mortgage and how much rent do you get each month
2) How much is your second house and how much is your mortgage

I really believe people are kidding themselves into making a profit . I don't believe it is possible

chief518

yep I agree Lypsey and I don't believe there will be this so called 'soft landing' for BTL'ers if they haven't done the sums right.

Back to my situation and I agree there is no profit:

(south east btw) Rent of 925pm with a remortgage of 170k IO. After the full management fees from the agent, 1xvoid, annual gas certificate, insurances and a few hundred pounds for the unknown it barely breaks even. If costs such as the interest rate go up I'll be forced to switch to a tenant only service and get my hands dirty.

The old house is worth 250k so there is also 80k of equity lost interest to consider if I sold it today. So for example based on a simple Scottish widows 60 day notice account over 10 years this would be compounding overall 4310 a year (to 123100 total) so further money gone.

Why bother? Primarily, the old chestnut of whether the property will increase in value above what the interest/investment of that equity could earn elsewhere in 10 years. So assuming this BTL actually breaks even [novel] the profit will be only above 43k increase according to the Scottish Widows account and that’s far from the best out there.

Secondly, as security. If things take a turn for the worst and we have to sell the new house then we will move into the old one which is friendlier in terms of monthly costs.

Thirdly, opportunity. I would not consider buying our house at its market price to purely BTL with it. But with the opportunity of buying it 80k below asking price and without stamp duty is much more attractive. It’s in the nicer of the estates from the area and rental demand is good. This should grow as there are plans for strong expansion around here bringing new people into the area. It’s also not a new flat or a new build house…

So there you go, eyes wide open into the Lions den of BTL investment and I’ve just noticed my name isn’t Daniel…

lypsey

Chief
Interesting post . If I was in your position I wouldn't bother
1) Interest only mortgage is a "no brainer" , you are renting from the bank in the hope your property rises in value.
2) When this market turns ( I believe it has started) your 80k profit could be eaten up inside 24 months. Don't forget if you sell today you will have tax implications on the profit
3) I hope for your sake you have fixed your mortgage for the next few years . Inflation and in turn interest rates are climbing not just in our country but all over the globe. We could see another 1 or even 2% rise in rates.

If you take a look at the builders shares on the stock market or Bradford and Bingley (who have the biggest BTL book) most of them have been pasted in the last few months... reason?? The professionals know that the housing market has passed its best and they are in the s**t . These people are thinking financially and not like the man in the street who has been brainwashed into thinking house ALWAYS go up
I think you have a risky strategy but I wish you good luck

chief518

Hi Lypsey,
All valid points there and I hadn’t picked up on monitoring the Builders share prices so appreciate that, not sure why the thought hadn’t occurred to me. I agree, it is risky, and if the marker in the ground for selling was not 10 years from now I would give it a miss.

I could show you a link for a house local to me advertised for 4 weeks at 695k, which was then dropped to 645k and then a further 4 weeks later, to 595k. That wasn’t due to a housing crash that was just plain [strike]greed [/strike]trying their luck. I should know. I was one of the ‘lucky’ ones called by the Agent to tell me about it before it went to market with the exclusive chance of viewing it before others. I forget why I didn’t make it in the end.

I’d love to subscribe to the thought that over the short, medium and long term house prices will continue to rocket especially with this new BTL of mine but I’m not convinced. My gamble is a steady increase of the BTL over a medium 10 years along with the security aspect the 2nd home gives. We have tried to be cautious with this property, much to the disapproval of the mortgage lenders, they were quite happy to lend us amazing amounts of money which were completely disjoined to the rent.

If it wasn't for the fact we want to move we wouldn't! I’m not convinced the house we are buying is worth what we are paying for it and I was disappointed when the mortgage valuation came back as saying it was worth what we offered. Funnily enough it would only cost 44% of the offer price to rebuild it.

Still onwards and downwards, then sidewards and then hopefully, (in 10 years time), back slightly higher than where we started.

Best regards
Chief

lypsey

Chief
If you say " I’m not convinced the house we are buying is worth what we are paying for it" I suggest you don't do it , you will always regret it

chief518

I'm saving up regret as something I can experience when I'm on my last legs, after all, I'm not going to be able to do much else.

silvercar

Thought I would mention the non-financial gain of let-to-buy. You get the house you want to buy with no problems in selling your own house, no chain to worry about. You get the house you want when you see it, rather than hope there will be a house you like when you have found a suitable buyer for your own place. You are then in control of the house purchase and the whole process becomes far less hassle.

Anyone want to quantify that?