New Mortgage & Buy to Let

Ollie_D

Hi all,

I'm almost thinking out loud here, but would value any advice or comment.

I currently own a house (£125,000) with approx. £66,000 left to pay. Deal runs out in 2 years, current redemption charge is around £3k.

I wish to purchase a new property (£250,000) ideally with an LTV at 85% (or less), which would mean a deposit of £38,500.
The simple and easy solution is to sell my property and use those funds for the deposit, but to make things ‘fun’ I’d like to retain my current property as a Buy-to-Let.

So as I see it I need to take some equity from my current property, to fund a deposit on the new property, and ideally arrange the mortgages so I can keep my current deal so avoiding paying the £3k ERC.

My current thoughts are…

Take additional loan out on current property, the mortgage provider has indicatively advised I could have £40k. Convert current mortgage to Buy-to-Let, subject to the provider agreeing. Then use the £40k to fund the deposit for the new mortgage.

Does this sound feasible? Are there any other options I’m missing?

Thanks!

kingstreet

You will need to leave about 25% equity in the property to make it a let to buy and your current lender is unlikely to lend you the amount you need for a deposit when you tell them your plans. You are not likely to be able to avoid the ERC as lenders don't do penalty-free conversions from residential to investment.

The project will need to be considered self-financing at 6%/125% or you will lose residential affordability. Have you got a formal written assessment of the rental income potential from an ARLA registered letting agent? If not, get one.

Finally, you have the 3% SDLT surcharge on top of usual tax on purchase.

Pixie5740

Are you still planning to use HTB EL to fund the purchase of your new home?

Ollie_D

kingstreet

If I accept that I'l have to pay the ERC, I may be better off remortgaging and putting the mortgage and additional loan on a better rate. Alternatively, I could port my current deal to my new house purchase and then take out a new mortgage on the Buy to Let.

I plan to have some valuation carried out soon both for sale and rental, a rental almost identical to mine is currently renting at £650, and I have calculated a mortgage (or combined mortgage/loan) payments of £400-£450.

As for SDLT it's annoying that I'll have to pay the extra 3% on what will be my main house rather than the cheaper buy to let, but have factored in that cost.

Pixie5740

If I try to keep my current property as Buy to Let, then HTB EL is a no. If I do sell then it will be a case of seeing what better deals are available if I get a bigger deposit using HTB.

Thrugelmir

Ollie_D wrote: »

Then use the £40k to fund the deposit for the new mortgage.

Some lenders may not like the source of the deposit, i.e. released equity. As the net result is to leave you with a total debt in the region of £316k.

I plan to have some valuation carried out soon both for sale and rental, a rental almost identical to mine is currently renting at £650, and I have calculated a mortgage (or combined mortgage/loan) payments of £400-£450.

Only the interest element is tax deductible. Are you impacted by the forthcoming changes to the tax rules. That commence from next April.

Ollie_D

Thrugelmir wrote: »

Some lenders may not like the source of the deposit, i.e. released equity. As the net result is to leave you with a total debt in the region of £316k.

OK, I may consider porting my current mortgage to the new property, and take out and additional mortgage to top that one up. And then take out a separate BTL mortgage. I plan to talk this through with a financial/mortgage advisory.

Thrugelmir wrote: »

Only the interest element is tax deductible. Are you impacted by the forthcoming changes to the tax rules. That commence from next April.

I'll have to admit I wasn't aware of the tax changes, which will make a difference, but I think only as much as I won't get as much profit and shouldn't affect the affordability. At this stage I'm just try to figure if it's plausible, I'll then do a detailed breakdown of the figures to see if it's viable.

AnotherJoe

Ollie_D wrote: »

I'll have to admit I wasn't aware of the tax changes, which will make a difference, but I think only as much as I won't get as much profit and shouldn't affect the affordability. At this stage I'm just try to figure if it's plausible, I'll then do a detailed breakdown of the figures to see if it's viable.

On the figures you've provided it isn't. Around £2k a year minus expenses and tax. If you net a bit more than £1k a year, it will take 6 or 7 years just to break even on the extra 3% SDLT on the new purchase. One bad tenant could lose you double that again.

This is even before you consider risk and hassle amd that if you just put your current equity into your new house you'd have a better LTV and a lower mortgage rate, the lower payments for which which you could look upon as guaranteed, zero risk, tax free profit.

Ollie_D

You might be right AnotherJoe, but I'm tempted to give it a go. Maybe give it a year, and if it isn't for me sell-up and attempt to claim back the stamp-duty.

Just spoke to my current mortgage provider and in principle they would be happy to convert my current mortgage to BTL for a fee of £300 allowing me to see out the remaining two years on my deal. They were also open to me porting and borrowing more.

AnotherJoe

Ollie_D wrote: »

You might be right AnotherJoe, but I'm tempted to give it a go. Maybe give it a year, and if it isn't for me sell-up and attempt to claim back the stamp-duty.

Just spoke to my current mortgage provider and in principle they would be happy to convert my current mortgage to BTL for a fee of £300 allowing me to see out the remaining two years on my deal. They were also open to me porting and borrowing more.

On what basis? Giving it a go wont change the numbers, assuming the rent and mortgage figures you gave are correct.

I can imagine you telling Isaac Newton "yes OK your calculations based on my weight and the height above ground this ledge is on may show me plunging to a bloody mess if I jump, but I'm going to give it a go anyway"



Are you planning to be in this to make a profit? If so, I dont understand why you'd rush into a business venture that has a 6 year pay back figure. Would be good to watch on Dragons Den though :eek:

Ollie_D

On the Basis that, I want to get into the BTL market, and figure it's a lot easier to do it with a property I already own rather than spending more money purchasing another property later on. From the rough calcs. it still shows a net profit and it will also be making capital repayments. With the possibly of claiming back the stamp-duty within 3 years, I see it as a moderately low risk trial. If it doesn't work financially or I don't get on with BTL then I can i back out knowing I tried.

robsmg

Hi Ollie,
What you are talking about is called a 'Let to buy', go and speak to a broker about what you are trying to do and they will either be able to say yes, or no. The initial meeting shouldn't cost you anything and will give you the answers you are looking for. Be aware though, most lenders are changing their BTL criteria in Jan/Feb as they have been told by the FCA that your income needs to be more taken into account than it has been.