Let to buy/ Equity release query please.

scleics

Dear all,
Long time lurker, first time poster so please be patient with me.

We managed to make overpayments for several years and now about to be mortgage free (with HSBC) within next couple of months. The property is valued around £300,000 ( Ref Rightmove and similar properties in neighbourhood).
As the family has expanded we'd like to move to a bigger house but we are not keen to sell our current house. There are several reasons including breakdown of chains causing distress last time and emotional attachment with our first home (not very rational !).

We'll rent it out after touching it up a little bit and similar properties in our area ( again ref Rightmove) are currently being rented out for approximately £ 1000 PCM.
After some research I decided to explore the concept of "Let to buy" mortgage, where we obtain mortgage ( ? equity release) on our "current home value plus rental income" and use that towards the deposit for our next home and take a separate mortgage on the second home.
I believe this is a tax efficient system as I can offset tax from rental income against the mortgage interest.
We are both higher rate taxpayers, are 48 years old and our joint income is about £150,000 pa before tax.
I went to my local HSBC branch to have a chat with their adviser. She was not a mortgage specialist but she was the one who we needed to see first for a DIP. For some reason their system was not geared towards the Let to buy or Equity Release concept and she also didn't grasp the concept very well and kept coming back to Buy to let.
Eventually she decided to just give me a DIP based on our current income/outgoings as a New Mortgage towards the second house and that came up as £400,000 for an imaginary property of £475,000.
I believe she did a "soft" search. We do not have any outstanding loan. Also their system apparently frowns down on anyone taking a new mortgage which will extend beyond 65 years.

I am not entirely sure if I want to go back to HSBC for a formal application as this was not what I had planned.
I also have appointments coming up with Barclays and Halifax but I wonder whether they would also fail to grasp the Let to Buy concept.
I do not think that is a new concept as I have seen that mentioned in several mortgage sites. I have also looked into Equity Release but that is a bit unclear to me.
I had switched mortgage several times successfully in the past dealing directly with banks without an IFA, but I wonder whether this time it is worth going to a knowledgeable IFA in this field ?

I looked at John Charcol site where people ask questions and I found a couple on Let to Buy. Looks like this may end up being two different mortgages from different providers.

What are my chances of getting a mortgage/equity release of approx £ 200000 on my current house, using that as deposit towards the second house worth £500,000 so that I need to raise another £ 300,000. I can use deposit of £30,000 and ask for a mortgage of £ 270, 000 for the second home, which would be our main residence.
I am thinking of giving L&C or John Charcol a ring later but any advice or criticism of my financial planning will be greatly appreciated. I am willing to pay a reasonable amount of fees if someone can recommend an IFA used to dealing with similar scenarios.
Many thanks.

kingstreet

Right. It's a remortgage. Let's get away from phrases like "equity release," as that's a red herring in this context.

You are looking for a Let To Buy or Buy To Let remortgage. These terms can be interchanged as many lenders choose one or the other.

You'll be able to borrow the lower of 75% of the valuation of the property as confirmed by a lender's chosen chartered surveyor, or the mortgage amount covered by the rental income of at least 125% of the monthly mortgage interest, assuming a rate of 6% per annum, or thereabouts.

So, if the property is truly worth £300,000 you can borrow the lower of 75% (£225k) or £1,000 pm rent = 125% of £800 x 12 = £9600 / 6% = £160,000.

So, the maximum mortgage will be £160,000 assuming the rental valuation also done by the lender's chartered surveyor matches your estimate.

You can go beyond state pension age and take the mortgage on interest-only, with sale of this or your new property as the future repayment vehicle

You can then put that as your deposit on your onward residential purchase, after taking into account any fees.

Provided your let property/mortgage is considered self-financing, which it will be based on the formula I used earlier, your new lender should be willing to lend for your onward purchase, although you may be limited to a term which ends before your 70th birthday, or even earlier with some lenders.

Be careful with lender selection as some lenders won't want to lend to you on your new residential with another mortgage in the background, or will deduct the mortgage from what you can borrow regardless of the rental income.

An independent mortgage broker would be an invaluable source of advice and correct lender selection in these circumstances.

scleics

Thanks a million Kingstreet. This is exactly what I had in my mind and didn't manage to convey to the HSBC lady properly. I agree equity release is not what I should consider.
You are spot on with all the figures that I was expecting from my own research , the only thing is that you quoted a rate of 6 % whereas I was seeing a notional interest rate of 5 % mentioned. But of course you are a pro and have current knowledge while mine is from trawling the internet so I defer to your much superior knowledge.

I am not really that keen on interest only mortgage and think we are capable of the full mortgage payment even if our rental property stays empty for a period.
Honestly speaking we would like to keep our current house ! I am aware that our age may be a problem but I hope the lenders will give a loan over 20 years which will take the term to 68 years, just one year above the state pension age.

Hmm, now time to start looking for an independent broker as this is clearly beyond me !!!

Many thanks once again !

kingstreet

If you use 6% as I have, I know you will have the run of all the lenders offering products and will get the best rates.

If you use 5%, you'll be limited to lenders who will accept that (and there aren't many) which will mean the rates may not be as good.

You'll have to decide on the trade-off between being able to borrow more and what is the best rate which can be secured.

Fine on repayment, if that's your preference. You won't be restricted on the term by many lenders, as long as the mortgage is repaid by 70.