Does renting out our current property reduce our borrowing power for our second property?

clairebeth

Hi, as it says in the title, just wondering about whether our borrowing power would reduce despite the rent on the first property covering its mortgage?

Figures are:

Property 1
Value: £265k with 25% equity, 
Repayment mortgage £780 a month
Proposed rental income £1100 a month. 

Property 2 (our proposed new home)
Value c.£400k with 15% equity
Monthly payment c.£1350 a month. 

Land tax c.£27500 (Scotland)

Combined income £88k pa.

No debt/ credit cards/ higher purchase.  

Although £425 a month in childcare (using childcare vouchers, so more like £300 a month net), which will no longer need to be paid as of next June. 

Is this sort of borrowing realistic for us? Online calculators suggest we could borrow over £370k, but is this true if we still have the rental?

Thanks in advance. 

Sibbers123

You’ll need to get a BTL mortgage on existing property which will be higher interest.

Other than that, you will need to speak to a mortgage broker, not a DIY job. You’re quite highly geared, which could be a problem. Even if you can get the finance, you will want to think very carefully - if house prices drop, you could end up with no equity in either house, worst case scenario.

clairebeth

Thanks so much, yes, those repayments are based on the btl interest rates for the first property. 

That's my concern also, that it's a lot of borrowing, and would we find ourselves in a tricky situation.

However, both properties are Edinburgh City Centre, a market that I have a lot of faith in!

Thrugelmir

Have you factored in tax on the rental income? Plus on going maintenance and voids etc. 

With that level of debt I have to ask if your jobs are secure. With only one income and no rental income sleeping wouldn't be easy at night. 

clairebeth

Thanks Thrugelmir! I feel the remaining £300 a month should cover maintenance etc. Plus we do have an emergency fund.  It's not so much that we want to make a profit on it now, but rather keep it as a long term investment and move back in once the kids (aged 4 and 8) have grown!

My husband is a Deputy Head Teacher (Council) and I'm a Nurse Practioner (NHS).

Thanks for your advice everyone. We are pretty debt averse  people, so I fear this plan is really just thinking with our heart and not our head in not wanting to sell our current property. It's 700sq feet and we love it, and I have always believed that we can 'live small' despite many comments from family and friends that it will never last. We (like everyone else) have struggled immensely during lockdown and it has forced us to question these values and think about having more space.  

Perhaps it's something for us to let the dust settle on and revisit in 6 months or so. 

Many thanks!

haras_n0sirrah

There are some lenders who use the balance of the outstanding mortgage within affordability, others use the payment in affordability - a subtle but massive difference when it comes to the calculator
To be able to confirm we would need to know
number of children
age of oldest applicant
income split (so who gets what from 88k)

This is one for a broker as different lenders have different deposit requirements if you have another property in the background plus as I say the way they record the mortgage and whether they will use the rental income to offset it will also make a big difference.
A number of independent brokers post of this board (we are identifiable by our signatures). Those of us who post here are now allowed to approach forumites but most of us are happy to answer pm's asking for help. If you don't have a broker why not read the boards and approach someone who you feel can help you. This is not one for the likes of L&C as it is complex in nature.

[Deleted User]

OP - you do need to factor in the tax you will have to pay on the rent. Apart from a few repairs, gas certs,insurance and any professional fees etc you cannot offset anything else against the rental income. So the rent is £1100 per month - say £950 after the above. That money will be added to your income by HMRC. 

All you can claim is a 20% tax “credit” of the interest you pay. On £265k interest at say 2.04% is £450 a month. 

The taxable rent is £950 and all that is added to your income making it £11,400 per year
However you will only receive £1080 per year as a credit against your tax bill for the interest payments you pay on your BTL loan. 

If either of you are higher rate that persons share will be taxed at 40% but you still only get the 20% tax credit 
its really rather rubbish now as an income stream due to the Gov Tax rules changing 

Vestraun

Are you sure your rental figure is correct too? £1,100pcm on a £265k flat in Edinburgh sounds on the high end. At £265k I expect it’s a high end 1 bed or fairly standard 2 bed which would both top out at about £900-1,000pcm in the current market. 

Thrugelmir

clairebeth said:

Thanks Thrugelmir! I feel the remaining £300 a month should cover maintenance etc.

Appears to be no tax deduction in your calculations. On a simplistic basis. From the rental income you can deduct the interest element of the mortgage repayment. The net income is then subject to tax. Capital repayments are in effect made from after tax profit. 

clairebeth

Thanks Densol! That makes a lot of sense and gives us a lot of clarity. Neither of us are higher rate tax payers yet, but will be in a few years once I go up my pay spine and we stop paying childcare vouchers. I was aware of the tax implications, but struggled to get a clear head around it. 

Vestraun, yes, we've had it valued. While it might go for closer to £280k at sale, it's likely a valuer would say £265k. It's a two bed Georgian flat just at the Newington end of the Meadows. The flats in the same stair rent from £1000 to £1200, but the £1000 ones are the smaller ones on the other side of the building. We are one of only two owner/ occupiers in the stair so I see how much the others are let for regularly. 

Thanks guys, I think it's clear that it makes far more financial (but heartbreaking) sense just to sell and then buy. We could have a lovely £130k or so deposit. I think we'll wait a while and save up a bit more too.

Thanks so much!

corcutt

Any other commitments other than the new mortgage you wish to take out will affect the lender's risk assessment calculation. Your first mortgage will undoubtedly fall under that.