Buying 2nd home as main property and turning 1st into rental

Amit_K

Hello All

So i'm in the fortunate position of being able to consider purchasing a 2nd home, we have one home already which is our main residence.  We want to buy another as we need bigger space with growing kids and also want a change of an area.

We still have a mortgage on our current home, we own about 45% of the house which i feel is a decent position to be in and we have roughly 20% deposit for the 2nd home.

So the new home purchase would be our main residence and we would like to keep our original home and let it out for rental income and in the long term be able to sell the home to provide a deposit for our kids for when they want to buy a home.

I understand that there is additional stamp duty when purchasing a 2nd home and you need a greater deposit than for a first time purchase (circa 20%-25%) but i feel like there are quite a few scenarios which i need to consider ie:

- release some additional equity from my current home by remortgaging with buy to let, adding that additional equity to my deposit towards the new home.

- or do i pay more off my current mortgage which will overall benefit me when applying for the 2nd mortgage

- or do i sell my current home and use the funds to purchase the new home with a lower mortgage

- am i missing a lot more and i probably should speak to an IFA. 

I'd be happy to hear from everyone with advice and experience with this, i'm sure plenty of people have owned 2nd homes and more and had this scenario.

Thank you

Slithery

Do you fully understand what starting a residential lettings business entails?
Read the following thread and all of the links it contains before taking this idea any further...
Tenancies in Eng/Wales: Guides for landlords and tenants

AdrianC

Amit_K said:

So i'm in the fortunate position of being able to consider purchasing a 2nd home, we have one home already which is our main residence.  We want to buy another as we need bigger space with growing kids and also want a change of an area.

We still have a mortgage on our current home, we own about 45% of the house which i feel is a decent position to be in and we have roughly 20% deposit for the 2nd home.

Give us some numbers...

Whatever you do, you're going to be borrowing a LOT more than if you do the normal thing. You're going to have a very big mortgage monkey on your back. Great while the tenants are paying rent on time and there's no bills... Less good when the tenant does a runner owing you months of back rent and the boiler's knackered.

Does your current property even make sense as a rental, even before considering how heavily leveraged you'll be? What raw yield are you looking at? What are you expecting the net yield to be?

sst1234

Impossible to say without knowing some more. What is the value of your current home, expected rental yield, value of new home, household income etc. Buying a second home to live in while renting out the first is a good way to build an investment property over time. Being a landlord requires some effort and a lot of luck with getting good tenants but you don’t need to be a rocket scientist to be able to do it.

saajan_12

Amit_K said:

Hello All

So i'm in the fortunate position of being able to consider purchasing a 2nd home, we have one home already which is our main residence.  We want to buy another as we need bigger space with growing kids and also want a change of an area.

We still have a mortgage on our current home, we own about 45% of the house which i feel is a decent position to be in and we have roughly 20% deposit for the 2nd home.

So the new home purchase would be our main residence and we would like to keep our original home and let it out for rental income and in the long term be able to sell the home to provide a deposit for our kids for when they want to buy a home.- any reason why you want the investment in a property rather than something else that's less time / tax intensive eg stocks, which could grow and be given to the kids too?

I understand that there is additional stamp duty when purchasing a 2nd home and you need a greater deposit than for a first time purchase (circa 20%-25%) - well sort of.. you'd need to convert or remortgage the current property to a BTL (or LTB) mortgage which generally requires minimum 25% equity and then get a normal residential mortgage on your new purchase, with whatever LTV the lender will loan you based on your income. but i feel like there are quite a few scenarios which i need to consider ie:

- release some additional equity from my current home by remortgaging with buy to let, adding that additional equity to my deposit towards the new home. - doesn't make much difference if you keep up repayments on both, just depends on how much the bank will lend on each and the interest rates. 

- or do i pay more off my current mortgage which will overall benefit me when applying for the 2nd mortgage - that would just put you in a higher LTV on the new property.. 80% is not at the limit but its not low. Either way, doesn't really make much difference at this stage, just something to work out with your broker to figure what you can get and at what rates. 

- or do i sell my current home and use the funds to purchase the new home with a lower mortgage- you could then lower your mortgage payments and put that into another investment.

- am i missing a lot more and i probably should speak to an IFA. 

I'd be happy to hear from everyone with advice and experience with this, i'm sure plenty of people have owned 2nd homes and more and had this scenario.

Thank you

If you have two properties at the end of the day and a certain amount of equity / cash currently, then you'll need to borrow a certain amount in total. How that's split between the BTL and residential aren't really important at this stage and you can work that out with a broker based on ERCs on your current  mortgage, LTV limits the banks will lend and the interest rates available. 

The bigger question is whether you want to borrow that much, and take the responsibilities of a landlord (have to find the money for mortgages / repairs even if tenants don't pay, court costs, time to find tenants and deal with anything that comes up). Its not impossible and many people do it, but it depends on whether you have the flexibility to cover that, as there's always something to do even with agents. The alternative is to sell your current property and invest some / all of your equity elsewhere eg stocks and shares. You'll also have lower mortgage payments so can invest the saving plus any dividend, similar to how you would invest your rental income. 

steampowered

An important question to ask is what is your tax position and what does your pension look like.

If you choose to invest in property rather than in topping up your pension, and you are a higher rate tax payer, you are losing out on 40% tax relief from the government. It would take a decade or more to generate that sort of return from a BTL. Not to mention that you would expect to get a long term average return of something like 6-7% per year on investments in a pension (and the 6-7% compounds on top of the 40% top-up from the government).

If you do decide that you would like to use this money to start a residential lettings business, then you are going to need to borrow most of the money to start your business from the bank. You would probably want to have a higher LTV on your residential property and a lower LTV on your BTL, because the interest rate on BTL mortgages tends to be higher.

You should also consider putting some of the money into a stocks & shares ISA - you can invest up to £20k per year per person. The returns from this are likely to be superior than BTL (you might expect to generate 5-6% per year from a bog standard medium risk investment), the returns will be tax free, plus it is more flexible (you can sell some of your investment at any time if you need to realise cash), plus you are diversified across different assets. It isn't a good idea to have all of your money locked up in a single property.