Converting current house/mortgage to buy-to-let & buying new property

ridpath · 3 July 2016 at 6:17PM

Hello all,

I've decided to move out of my current house and purchase a smaller property for myself. I'm planning on retaining my current property, and converting it to a buy-to-let. I would be grateful for some advice on a couple of items.

Firstly, I've done a lot of renovation on my house, and I know the prices have risen quite a bit in my area since purchase. I've got a fair bit of equity (around 40%), and am planning on leveraging off 15% when my current residential mortgage detail ends in November and I convert it to a buy-to-let mortgage with a 25% deposit. Does anyone have any advice on how I can maximise the valuation of house for the new mortgage as well as anything else I should consider?

Secondly, sequencing. It seems like I should (if I can) avoid a scenario where I try to exchange/complete on a new place, the same day as my mortgage runs out, but I can't access the locked-up equity until I remortgage. In fact, more importantly, I won't know how much equity I will have to play with, unless I get an early valuation? Would I be able to stay in my property on a buy-to-let mortgage whilst looking for somewhere, or at the minimum, potentially looking to complete a few weeks after the mortgage coverts (assuming I've already had an offer accepted)?

Thank you.

booksurr · 3 July 2016 at 6:25PM

no you cannot live in a BTL whilst looking elsewhere

so how much cash deposit do you have? If you plan to buy a small residential property and need a mortgage for that the fact you have borrowed 15% from the BTL will affect your residential mortgage affordability calculation

have you allowed for the higher rate SDLT?

ridpath · 3 July 2016 at 8:18PM

Thanks for the reply booksurr.

My house was purchased for £227k, I have £90k of equity and £10k deposit. I estimate the house is now worth £300k, so my intention was to reduce the mortgage from £137k to £75k, i.e. 25% of revised value, freeing up £62k. The £10k alone is not a sufficient deposit to buy a new place (looking to spend between £180-200k).

When you refer to SDLT, I presume I just need to pay the normal, rather than buy-to-let rate for the new property? It was not my intention to convert the current house into a buy-to-let, my circumstances have changed. I've been in the property for nearly two years.

Kynthia · 3 July 2016 at 10:36PM

You currently own one property and you will end up owning two. You will be paying the additional stamp duty charge which is designed to cover this scenario.

brit1234 · 3 July 2016 at 10:54PM

You will have to pay the extra 3% on top of normal stamp duty as you already own a home. As of 2017 your buy to let tax allowance will be eroded each year over the following 4 years. This may push you into a higher tax bracket if you aren't in the top one already.

booksurr · 6 July 2016 at 3:53PM

ridpath wrote: »

Thanks for the reply booksurr.

My house was purchased for £227k, I have £90k of equity and £10k deposit. I estimate the house is now worth £300k, so my intention was to reduce the mortgage from £137k to £75k, i.e. 25% of revised value, freeing up £62k. The £10k alone is not a sufficient deposit to buy a new place (looking to spend between £180-200k).

does not make sense

you want to buy a property for 180k
you have 10k in cash - that would barely even cover the Higher rates SDLT (£5,400 @ 3%) plus the associated legal costs etc of buying.

where is the money coming from to "reduce" your existing mortgage by £62K??

You are not selling anything, so the only way to "reduce" that mortgage is by borrowing £62k against another property and using that money to pay off the existing mortgage of £137k. The mortgage balance doesn't magically disappear just because you have 90k of equity in the house!

In which case you need to borrow 180k + 62k secured against the new house - and that is :rotfl: :rotfl:

tlc678910 · 6 July 2016 at 11:15PM

I think the OP meant increase the mortgage?

You want to leave 75K in the property (25%). Your property is worth 300K but you still owe 137K(?) so you can try to get 88K of equity out of the property to carry to your new purchase....300 minus 75 (deposit) minus 137 (mortgage outstanding).

The rent you can achieve for your property normally needs to be at least 125% of the interest only mortgage payment so you can make sure this works out e.g. If your interest only payment will be £800 your house must be able to rent for £1000.

I think some lenders will allow for your buy to let to be self financing when you apply for your own residential mortgage but I think others calculate the payments into your affordability e.g. If the property was vacant and you had to pay both mortgages could you afford it? so I would chat to a broker to make sure you are likely to be able to obtain the residential mortgage before you commit to the buy to let plan.

Also consider if you are likely to make any money in a term you find acceptable. E.g. if you will achieve any rental income over and above interest only mortgage payments and likely costs (insurance, maintenance, voids, tax etc). House prices are reasonably likely to fall a little in the short/medium term so if you are not in it for a decade or more I would say there is a reasonable chance you will be down on your investment.

Having all the hassle and risk of being a landlord is not worth it if you don't reasonably expect a return on your investment in either rental income (typo corrected) (beyond servicing an interest only mortgage) or rising equity via house prices. Of course if you see it as a long, long term investment I'm sure it will work out fine eventually.

Good luck
Tlc

ridpath · 9 July 2016 at 10:34AM

Hello all,

Thanks for all the replies. Firstly, I didn't realise you had to pay the higher rate of SDLT, as I'm not buying a BTL as such, so will need to recalculate for that.

Yes, the scenario you describe tlc678910 is what I'd like to do. Remortgage (as a buy-to-let) and reduce the deposit to 25%, I want to extract the additional sum.

Even if the house has not risen in price, I still have circa 40% equity and my understanding is that on a BTL basis, this can be reduced to 25%, freeing up 15% (£34k). I am hoping for a higher valuation, not relying just on house price, but also on quite a bit of renovation I've done. It's a long term investment, I do not intent sell, so am not concerned about house prices falls as it may equally be accompanied with an inverse affect (help me secure a second property for a lower price).

I've done the maths on the mortgage v rent (+125%), and it comes out favorable.

One thing I am stuck on, if I'm relying on remortgaging to release the equity, do I have to move out, rent and then look for a place once I have the additional equity in cash?

Another potential option is that I can take out a residential mortgage without tie-in when mine ends, and extract out enough equity to make the house purchase then. However, I won't be able to afford a 75% mortgage on my current property, the largest I anticipate being able to borrow is £145,000 based on previous amount lent/current salary (just me), so the rest of equity would stay put till it converted to a BTL. Is this sensible thinking?

Thanks again.

booksurr · 9 July 2016 at 11:00AM

ridpath wrote: »

One thing I am stuck on, if I'm relying on remortgaging to release the equity, do I have to move out, rent and then look for a place once I have the additional equity in cash?

as stated in the first post you cannot live in a BTL - that would be breaching the mortgage T&C - what the consequences would be of such a breach, and how they would find out, is another matter...