Going buy to let: "So Sir, what's your strategy for paying back the capital?"

pph

Hi again.

Me and my significant other are moving to another city, leaving where we own on an interest only mortgage and using the margin between our new mortgage payment (much lower than out current capital repayment residential mortgage) to offset the cost of renting in a new place in the town we are moving to.

(We have checked with the bank and it's fine to transfer the residential mortgage into a buy to let. We're also aware that if/when we come to sell we'll need to pay capital gains tax. Am also aware we'd need to declare the rent as earnings.)

We are going for our meeting with the bank to make the mortgage application to switch to a buy to let where we currently live. They have asked me what our repayment strategy is - i.e. if we go for a 25 year mortgage and not pay back any of the principal of the loan during that term, what will we do in 25 years? These are the options I can think of:


1) I have assumed that a 2 bed property in zone 2/3 North West London will appreciate in value by an average of 3% p/a over the term of the buy to let mortgage (25 years). But we would plan to sell the place in year 20 and the selling price would be 4 times the value of the mortgage left. Is assuming 3% rise in value going to sound reasonable?

2) I have calculated the value of my own pension in 20 years (just adding mine and my employer's contribution, no growth) - my g/f hasn't got a pension. The total value of all my pension in 20 years from now will be pretty much bang on the amount of of loan we own the bank. I am 38 now so in 20 years under changes in pension law I should be able to start taking it out and pay back the bank what's owed to them (even if I need to do it over 5 years), then sell the house and keep all the proceedings (or carry on renting it out and that will be my pension).

Are these two strategies sounding reasonable to the MSE community?

Ideally, we would save the margin we earn between the buy to let mortgage and the amount we would let the place in London for in a high interest account but we need that money as we are both taking a big step down in salary moving away from London and she's going freelance so just starting out on a new career.

Thrugelmir

pph wrote: »

1) I have assumed that a 2 bed property in zone 2/3 North West London will appreciate in value by an average of 3% p/a over the term of the buy to let mortgage (25 years). But we would plan to sell the place in year 20 and the selling price would be 4 times the value of the mortgage left. Is assuming 3% rise in value going to sound reasonable?

What's the value now?

AnotherJoe

"Sell it".

It seems highly unlikely it wont be worth at least as much as now, so by definition you can clear the mortgage, you dont even need a rise in value.

ACG

If you plan on selling the property, that answer will be fine.

pph

Thrugelmir wrote: »

What's the value now?

It's appreciated 70% in value since Aug 2012.. but with Trump / Brexit / Goodness knows what... hence I am being conservative with the 3% thing.

If we sold it tomorrow we'd easily pay back the principal of the loan.

Thrugelmir

pph wrote: »

It's appreciated 70% in value since Aug 2012.. but with Trump / Brexit / Goodness knows what... hence I am being conservative with the 3% thing.

If we sold it tomorrow we'd easily pay back the principal of the loan.

Compound 3% over 25 years and I suspect that the property will be totally unaffordable. A totally unrealistic assumption. Your 70% is with the hindsight benefit of ultra low interest rates. A scenario unlikely to be repeated over the following decades.

Typhoon2000

I suspect house price inflation will match general inflation at the very least over that time period.

pph

Thrugelmir wrote: »

Compound 3% over 25 years and I suspect that the property will be totally unaffordable. A totally unrealistic assumption. Your 70% is with the hindsight benefit of ultra low interest rates. A scenario unlikely to be repeated over the following decades.

....your conclusion being....?

(P.S. Notting Hill was peanuts 20 years ago and now is unaffordable.. but people somehow manage to afford it)

pph

Typhoon2000 wrote: »

I suspect house price inflation will match general inflation at the very least over that time period.

I like this answer, I'll pretend it's my own when I meet with the bank

If I assume a 2% rise in property prices compounded over 20 years then the sale price will be 3.3 times the debt owed.

G_M

pph wrote: »

I like this answer, I'll pretend it's my own when I meet with the bank

Take care. Making fraudulant claims on a mortgage applicatin is a serious matter.

pph

G_M wrote: »

Take care. Making fraudulant claims on a mortgage applicatin is a serious matter.

Just meant I want to look clever in front of the bank

So I'll say "If the value of the flat goes up at the government's target rate of inflation on average over the next 20 years, the value of the flat will be 3.36 times the debt owed on the property. So we'll put it on the market after 20 years and it'll sell [within 5 years].