Long or Short Mortgage

Billy_Shears

Hi All, thanks in advance for any advice. 

I am shortly going to be purchasing the house that I currently rent from my in-laws. They very kindly are allowing me to buy it for the outstanding amount of their mortgage - £135k whereas its market value would be around £250k. Obviously very kind of them.
I have about £110k in savings and am wondering which is my best strategy going forward...

Bearing in mind that I would like to be in a position to buy a larger house next year, converting the mortgage to buy to let and renting it out. Should I...
 A: Use as much of my savings as as possible, and get as short a mortgage as possible, putting as much as I can afford on a monthly basis into the payments, and then getting as much equity out of it as I need for a deposit next year. Or,
B: Get a mortgage of £135K to cover it, keep the cash in the bank, and use that for a deposit. 
Or maybe C, something else?

Thanks everyone for looking if you read this far!

Billy.

jamielutz1987

If I was going to move in 2021, in your place I would go for B, get a 60% LTV resi mortgage now using the equity in the property as a deposit, keep the 110k cash as a deposit for the upcoming purchase and then either get a CTL or remortgage to a buy-to-let when the time comes next year.

Mind you this is definitely a job for a broker as you will have gifted equity, BMV, buying from a relative, etc. so you need a lender who's ok with all that.

dimbo61

I would also consider an offset mortgage.
That way you can use your savings to offset the mortgage debt while still having it available to use as the deposit on the next property.
You would still have the same mortgage payment each month but much more would go on repaying capital and less on interest.

dimbo61

If you plan on changing the mortgage from residential to BTL then don't go for a 5 year fix !
You can build up savings in the offset as you will need 20/25% deposit for the next bigger home plus other costs and the extra 3% stamp duty as you will own 2 properties 🤔

dimbo61

Most mortgage deals are at least 2 years so consider that time frame before moving.
Will your current home make a good BTL ? With a good yield 

Billy_Shears

Thank you very much Dimbo, an offset mortgage is a very good idea.
The house would provide a good yield as a BTL, I have no worries there. I guess I need to weigh up the penalties for changing the mortgage after only 9 months to a year...

bpj

Billy_Shears said:

I guess I need to weigh up the penalties for changing the mortgage after only 9 months to a year...

Also weigh up the extra stamp duty you pay by purchasing in this order, especially if you are currently a first time buyer. In that case if you go on to buy an e.g. £500k property you are more than £15k worse off buying the cheaper property first. Given how generous your in-laws are being perhaps they would be happy for you to wait until after your larger purchase to formalise the sale.