Can I unlock equity?

Billy_Shears

Hi All - Many thanks in advance for any help!

Ok, so a few years ago I inherited a small house. It's worth about £175,000 and is mortgage free and currently rented out to good tenants for £700 pcm. I am currently renting myself, but would like to buy sooner rather than later, but if possible I'd like to do it without selling the house. I like the tenants, however they cannot afford to buy it, and the extra income is always welcome. My question is, would I be able to use the value of the property to unlock equity or get a better interest rate? Also would I be able to use income from the house to increase the mortage amount?

Thanks for your help and advice!

kingstreet

Yes.

It's called a buy to let remortgage.

Billy_Shears

Ok, so would I end up with 2 mortgages? 1 buy to let mortgage, and then a regular mortgage for the house I pick? Presumably I would get a better deal as I would have a much better deposit/LTV ratio?

PasturesNew

As you already own one house, don't forget you'll have to pay the new extra tax when you buy the one you're planning.

Just mentioning it as it might persuade you to sell the one you've already got and simply buy your own house to live in.

Billy_Shears

Ok, thanks. I was hoping not to go down that route as I have long term tenants who wouldn't be able to afford the property.

If I did go for the remortgage to let route, what sort of equity would I be able to release? I also have about £50,000 in savings and a good income... But I need to buy in London so it is still tough!

Levs01

Just on the second home stamp duty, its a stinger as we have to pay It on our current purchase. £390k value is £22k (give or take a few quid) stamp duty (total). we have buy to let mortgage on our house so the situation would be the same for you. If you're London and the house value is higher then that's even more of a chunk. The extra stamp is 3% of the total value of the property.

Thrugelmir

As the property is unencumbered the rental income will be taken into account in terms of affordability.

While £700pcm sounds good as an income what's the net profit like after tax? After all you've £175k tied up in the rental property. Release the entire equity and you've got a really good deposit towards purchasing a property of your own.

How much is it costing you to rent is another factor to be considered.

How much would second home stamp duty cost you?

You can't have your cake and it so to speak. Money can only be spent once.

Billy_Shears

I'm paying 40% tax on the rent income, so £420 net pcm. I guess doing the sums the stamp duty is the killer. I'd be looking at property in the £400,000 to £500,000 range (ouch) so perhaps selling is the only real option. Even if I can afford to buy without the buy to let mortgage the breakeven point from the rent would be many years... however I do feel a spreadsheet coming on!

Thrugelmir

Why the need for a BTL? As a high rate taxpayer pension is more attractive.

Billy_Shears

Ok, this is probably going beyond my limited knowledge. I only became a higher rate tax payer this year, but am paying in the maximum amount into my pension scheme. I've only been in my job for a few years, but it's a career for life and will pay very well in the long run, however the training was very costly so I don't have so much cash at the moment and was hoping that the equity I have in the house could help me try and buy in london...

Thrugelmir

Billy_Shears wrote: »

Ok, this is probably going beyond my limited knowledge. I only became a higher rate tax payer this year, but am paying in the maximum amount into my pension scheme. I've only been in my job for a few years, but it's a career for life and will pay very well in the long run, however the training was very costly so I don't have so much cash at the moment and was hoping that the equity I have in the house could help me try and buy in london...

At the end of the day it's your choice as to the course of action you take. As there's no right or wrong answer. Personally I would base in on hard numbers in the cold light of day. With no sentiment attached.

By releasing equity you are leveraging with debt. Selling the equity gives you hard cash. There's a fundamental difference. Reward and risk go hand in hand. Depends how much you are prepared to gamble.