Is this a good idea?

Gemandcraig

We currently live in a 3 bedroom house rented from local authority. We have the opportunity to buy this property for 100k and we have around 10k saved so mortgage of 90k which would be cheaper than our current rent However we would like to buy a 4 bedroom house probably within the next 2 years however we don't have the income levels to borrow that much or the deposit needed. Would buying our current home abd overpaying the mortgage as we have around £500 left over monthly make us more attractive for a second mortgage using this property as equity?

Advice appreciated
Gem

lincroft1710

I would check very carefully the terms and conditions of the RTB, you will probably find that selling within 5 years means you have to repay some of the discount.

AdrianC

Gemandcraig wrote: »

Would buying our current home abd overpaying the mortgage as we have around £500 left over monthly make us more attractive for a second mortgage using this property as equity?

Can you just clarify...

Are you thinking of selling this property to buy the other one in two years?
Or are you thinking of renting this property out when you buy the other one in two years?

Cakeguts

What are you going to do if the amount you overpay in mortgage to buy an ex local authority house matches the level of increase in price on a non local authority 4 bed house and the house that you have doesn't increase in value at all?

Ex council houses are cheaper to buy than similar sized houses that have never been council houses.

If you want to have the best opportunity of buying a 4 bed house on the open market you need to start off with a 3 bed house bought on the open market not an ex council house.

Gemandcraig

No, We wouldn't be selling this property - We would be buying it to keep for children once this reach 16. We would rent this property out.
The 4 bedroom houses around this area are around £200k, I cannot see them increasing in price much in the next 5 years to be honest.

2 reasons for buying this house
-Currently we have no debt, loans or credit cards so this would increase our credit ratings and show we can pay off loans
-To have something in equity that can increase our chances of getting another mortgage in the future as we currently rent £500 per month and save £500 per month which is just dead money that could be put towards gaining something we own and having something as a sort of deposit or equity if that would work?

It may be best to just continue renting and keep saving - It will probably take another 18 months to reach £20k in savings for a deposit and then we can probably buy a 4 bedroom home in the local area.

But which is the better way of going about things?
Thanks
Gemma

AdrianC

Gemandcraig wrote: »

No, We wouldn't be selling this property

So on top of considering the HTB scheme rules, you'll want to consider the 3% SDLT. You'd be buying this place on a normal residential mortgage, then looking to move that to a BTL mortgage in two years. Will you have 25% deposit, to bring the LTV down to 75%, as well as deposit on the other property?

Will you be able to service both mortgages when you have a tenancy void after your tenant trashed the place when you had to evict him for unpaid rent?

The 4 bedroom houses around this area are around £200k, I cannot see them increasing in price much in the next 5 years to be honest.

So unlikely this will, either.

2 reasons for buying this house
...
-To have something in equity that can increase our chances of getting another mortgage in the future

And how much of this mortgage will you have paid off in that two years, as well as raising the deposit?

Gemandcraig

So we would still need a deposit for the 2nd property and could not use our 40k equity as collateral for the loan?

Yes I understand about the £4k sdlt we would need for a second property.

I am not expecting the first house to rise in value - Im not buying it for make a profit.

Gemma

AdrianC

Gemandcraig wrote: »

So we would still need a deposit for the 2nd property and could not use our 40k equity as collateral for the loan?

Sorry - what £40k? You would have £10k in equity, and owe £90k in mortgage on your £100k house. That would change a bit as you repay the mortgage, of course, but not that much over two years.

Unless you're meaning that the property would be worth £130k, but you're paying £100k under RtB. Yes, but that extra £30k may need to be repaid under the RtB scheme for a period - so you can't count it until that period expires.

You'll still need a max 75% LTV for the BtL mortgage, so £75k max mortgage at £100k value or £97.5k max at £130k.

I am not expecting the first house to rise in value - Im not buying it for make a profit.

Yes, you are. You're expecting to make a profit long-term through capital growth, and short-term through renting it. Otherwise, there's zero point in owning it, so just sell it, and buy a place for your kids when they want/need it.

Gemandcraig

Property is 110k, 10k off from council 10k deposit and then over 2 years paying around £20k off the mortgage through over payments so in 24 months it would be 40k off 110k which is around 66% so would fall within the right amount for a BTL mortgage wouldn't it?

In 10 years we wouldn't be able to just buy a house outright, yes I guess over that period I would expect house prices to rise.

The main reason to buy is so we have a sort of guarantor property and equity to act as a deposit/ collateral for the 2nd mortgage. If this wouldn't work I agree theres no point.

Gem

Owain_Moneysaver

AdrianC wrote: »

Sorry - what £40k? You would have £10k in equity, and owe £90k in mortgage on your £100k house. That would change a bit as you repay the mortgage, of course, but not that much over two years.

And if it's a semi or terrace (which a lot of local authority houses are) there may be liabilities if the local authority still owns part of the building and has a scheme for repairing or upgrading the whole building.

As well as all the usual costs of maintenance of course, which are currently covered by the rent.

AdrianC

Gemandcraig wrote: »

Property is 110k, 10k off from council 10k deposit and then over 2 years paying around £20k off the mortgage through over payments

Sorry, you're expecting to be able to OVERPAY your mortgage by almost a grand a month...?

In 10 years we wouldn't be able to just buy a house outright, yes I guess over that period I would expect house prices to rise.

Exactly. You're buying because you expect to make a profit.

The main reason to buy is so we have a sort of guarantor property and equity to act as a deposit/ collateral for the 2nd mortgage. If this wouldn't work I agree theres no point.

You can't "double-count" the money you have in equity on the first property. If you've reduced the mortgage to £70k on a £110k property (assuming the £10k RtB discount isn't at risk of being repaid), then you can only raise another £12.5k, max £82.5k/75% mortgage to put as a deposit for the second property.

If you can overpay the mortgage a grand a month, you can save that grand a month.

You would be spending a chunk on fees to buy the first property.
You expect not to make any capital growth on the first property.
So...