Letting out existing property to buy new home

churun

I am in the process of buying a new home with my fianc!e (we're getting married next year!) and have a few questions to check that my thinking is correct with regards to our future plans.


I own a home already but my fianc!e doesn't. It's valued at around £600k and there is still £175k on the mortgage, so I effectively have £425k of the equity in the house. We really want to keep the house and let it out, using the equity (plus existing savings and a mortgage) for our marital home. Our plan is to remortgage my current home on a buy-to-let basis and put any equity released towards a deposit for our marital home.


I have read about affordability criteria for buy-to-let mortgages, which typically require the rent to cover 125% of the mortgage at the buy-to-let affordability rate (which is 5.5% for Santander, just as an example). In our case, this would mean we should be able to release some of the equity (maybe around £200k) and still comfortably cover the buy-to-let mortgage payments with the rental income. What I don't quite understand is the mechanics of what happens next.


When I remortgage my house, do I then receive actual cash from the lender?


How is the buy-to-let mortgage viewed by lenders when we apply for a residential mortgage for our marital home (i.e. would it restrict our ability to borrow at 4.5x salary multiple)?


Do both mortgages have to be obtained simultaneously?


Our plan is to get a joint mortgage for our marital home, so do I need to have my fianc!e's name on the deeds for my current home or would the two mortgages be completely unrelated?


Thanks in advance!

MortgageMamma

The first thing that needs to be established is affordability for the second property, market rental estimate for the first property and whether the rental income will support the additional borrowing you require to raise the deposit for your next purchase.

It may not be as simple as getting a buy to let mortgage to raise an additional 200k capital, as some lenders will want proof that if your tenant fails to pay or vacates without you know that you can still afford the monthly mortgage payments.

You also have to consider the tax treatment of the buy to let. You don't say what you intend to spend on your marital home which is also a key factor.

I would urge you to seek professional advice from whole of market mortgage broker, to find the best route forward for you.

amnblog

Normally both mortgages complete simultaneously and some lenders doing the buy to let deal (let to buy in this case) will insist on it.

You can have further complications in that certain lenders on the purchase will have a major problem with the let to buy.

Then of course you are looking at an extra 3% stamp duty land tax on your purchase under the new rules.

This is a case for a broker for sure.

Thrugelmir

churun wrote: »

I have read about affordability criteria for buy-to-let mortgages, which typically require the rent to cover 125% of the mortgage at the buy-to-let affordability rate (which is 5.5% for Santander, just as an example). In our case, this would mean we should be able to release some of the equity (maybe around £200k) and still comfortably cover the buy-to-let mortgage payments with the rental income.

Draft proposals announced yesterday would indicate that both letting costs and tax should be deducted from rent before the 125% factor is applied. This will make a significant impact to the amount that maybe advanced. In addition allowance should be made for a 2% increase in interest rates. As a consequence a rate above 3.5% would result in calculation being higher than the baseline figure of 5.5%.

To cap it all there's the forthcoming tax changes to take into account as well. All of which take the shine of using debt to buy property to let.

dimbo61

Are you sure you want to take on this debt?
If you sold your current home and bought a new property together you would have a very large deposit and a smaller mortgage.
Do you want to be a Landlord and the tax relief would mean you make little if any profit for all the work involved

pathtofreedom

Do you have experince as a landlord? Have you worked out a business plan for the property to see if you'll make any money from it, voids, insurance, saftey tests, dead boilers..

Also with the new tax changes coming in are you hrt payers, or reliant on the current mortgage interest rate rebates to make it profitable. It will also mean you'll have to pay extra second home stamp duty when you buy your new place.

churun

amnblog wrote: »

This is a case for a broker for sure.

Yes, that's what I was suspecting. We have spoken to a couple of friendly brokers already and that definitely seems to be the best way forward rather than trying to juggle arranging two mortgages ourselves!

amnblog

churun wrote: »

Yes, that's what I was suspecting. We have spoken to a couple of friendly brokers already and that definitely seems to be the best way forward rather than trying to juggle arranging two mortgages ourselves!

Smart move.

It is so easy to trip up on these situations if you don't know what you are doing.

churun

Thrugelmir wrote: »

Draft proposals announced yesterday would indicate that both letting costs and tax should be deducted from rent before the 125% factor is applied. This will make a significant impact to the amount that maybe advanced. In addition allowance should be made for a 2% increase in interest rates. As a consequence a rate above 3.5% would result in calculation being higher than the baseline figure of 5.5%.

To cap it all there's the forthcoming tax changes to take into account as well. All of which take the shine of using debt to buy property to let.

Do you know when these draft proposals are likely to be enacted? Presumably if we managed to get a mortgage beforehand we would still be able to get a loan calculated under the current criteria. However, if the changes you refer to come into force, when it comes to remortgaging would that mean we might not be able to refinance our deal at all? That would be quite a worry, if we were faced with the option of either moving to the original lender's variable rate or having to sell at that stage because a mortgage was unavailable or unaffordable.

churun

dimbo61 wrote: »

Are you sure you want to take on this debt?
If you sold your current home and bought a new property together you would have a very large deposit and a smaller mortgage.
Do you want to be a Landlord and the tax relief would mean you make little if any profit for all the work involved

That's true, although we are attracted to the idea of being landlords for two reasons:
1) capital appreciation of my current home
2) the option to move back there some day


We are less interested in the profitability of the landlord enterprise itself (although that would be desirable, of course!) than the possibility of retaining some equity in my current house. It's in a good area, so desirable from a rental perspective and likely to benefit from good capital appreciation over time. I realise we would only have approx. 25% equity in it but we like the idea of having a separate property investment in addition to buying a new home.

churun

pathtofreedom wrote: »

Do you have experince as a landlord? Have you worked out a business plan for the property to see if you'll make any money from it, voids, insurance, saftey tests, dead boilers..

Also with the new tax changes coming in are you hrt payers, or reliant on the current mortgage interest rate rebates to make it profitable. It will also mean you'll have to pay extra second home stamp duty when you buy your new place.

No, we have no experience as landlords but we would ensure there is enough margin between the rental income and mortgage payments to cover any unforeseen or unwelcome circumstances. Nothing is life is guaranteed, but the house is in a desirable area close to the tube so we are reasonably confident it will never be empty for too long.


We are HRT payers but are not really relying on making a profit from being landlords, more from the capital appreciation in our equity in the house over the long term. Does that sound a reasonable strategy or not? The house is in London and has doubled in value over the last 10 years - not to say the next 10 years will follow the same pattern, but it's a decent basis for confidence, at least.


The second stamp duty charge sucks! We have factored that into our calculations, however.