Using house equity to buy another property

thenap80

I have a request for some guidance:

I currently own a house worth about 320k that I already rent out, earning 1200/month.

I have been advised that in order to make more money, I could remortgage a portion of my 320k house, say 250k.

I could then be in a position to buy another 250k property 'outright' with the money from the bank that is under a mortgage on first house.

And then renting out the second property.

Is this seen as a solid way of doing things. Would a bank even allow as I trued researching and releasing equity I read is available only if you are over about 55yers old. I'm sure I must be mistaken though.

Is there a name to this type of thing and is it advisable what with stamp duty, which I assume I would need to pay as it would be a second property.

The idea I was told would be to ultimately then remortgage the second property and get a third and so on...!

kingstreet

You are remortgaging and unencumbered BTL property.

'Releasing equity' is a euphemism used by those who don't like to admit to the stigma of borrowing money secured against property, for some strange reason.

Equity Release is also the commonly-used term for the elderly borrowing against the value of their home to raise funds to improve their lifestyle.

On your case, £250k is probably too much. You'll be able to borrow the lower of;-

75% of the value of the property
and
the mortgage amount based on your rental income divided by 145%, multiplied by twelve and divided by 5.5%.

This is because lenders will typically allow a mortgage where the rental income exceeds the mortgage interest calculated at 5.5% by 145%.

So, £1,200 per month means £180,564 mortgage and that is lower than 75% of £320,000 which is, of course, £240,000.

There are lenders who will permit what is known as 'top-slicing' which is personal income being used to help justify lending when the above calculation doesn't work.

thenap80

Thanks

Even a smaller amount borrowed would suit. Say 200k would be fine as I already have 70k in savings, meaning I could then still buy somewhere for 270k 'oiutright'.

What I do struggle to get my head round though is why is it best to do it this way - tat is to say, why not just take out a new mortgage on the second property I would buy? I'd be buying it in an indirect way. What does it matter which house I actually have the mortgage on. But this I was told is the BEST way to go about it, making use of my unencumbered (might as well use that word now I've learned it!) property!

kingstreet

thenap80 wrote: »

What I do struggle to get my head round though is why is it best to do it this way - tat is to say, why not just take out a new mortgage on the second property I would buy? I'd be buying it in an indirect way. What does it matter which house I actually have the mortgage on. But this I was told is the BEST way to go about it, making use of my unencumbered (might as well use that word now I've learned it!) property!

You're right.

It makes no difference, whatsoever.

In fact, try to keep any mortgage below 60% of the property value and you'll get the best rates.

Just be careful, if you end up doing a mortgage on each property, you might find the fees outweigh the interest savings.

You could always appoint a decent independent broker to do all this for you...

kingstreet

... then 'we' can tell you about the Government attacks on landlords which will see your income tax bill increase as less of your mortgage interest will be offset against rental profits...

... and how you'll be affected by the 3% second property SDLT surcharge...

... and how yields in the 'better' areas are so poor, landlords are buying up the north of England in search of better returns.

thenap80

So can I get a normal second home mortgage? Or does it need to be a BTL mortgage. Only I would be taking a mortgage out on a house I already own in which there are present tenants.

thenap80

Keeping below the 60pc then, I'm guessing I could approximately borrow 170k against my house and top that up with my 70k savings. A house or flat worth 240k - does that sound profitable?

How would the ban work it...would they need to know about my second property? Only I wonder how the money would ultimately go to towards the purchase. Is it via the bank or do the bank just out 170k in my account for me to do as I please?!