Can prospective rental income impact mortgage decisions?

Gerontion

Hi There,

Query (I have tried searching the forums for this).

I want to buy a property and rent out where I live currently. Mortgage is paid off on my current place, which I own jointly with my father, it's too big for just me and the plan was always to rent it out and me get a place on my own.

Initially I was thinking I would be able to buy something up to around £250,000. However, putting my salary and the savings I have ringfenced for the deposit together it rather sadly puts the figure significantly lower than I was expecting. Around £50k - £70k lower. Doubtless due to the Covid situation and uncertainty. I know I'm indulgent but I really want a study, so looking for a 2 bedroom to accommodate this. I live down south near London so prices are high! Struggling to find anything decent in my town (I'm not moving far) with an area I can use for a study as well as a living room/kitchen for ~ £190,000 which is my upper limit now.

I can compromise on the kind of property I want and get a 1 bed with a kitchen/living room area and a bathroom OR save a bit longer but neither I really want to do... The latter because my dad is retiring in September and was hoping he'd be able to realise some of his investment in rental income 

So my questions,

1) As I have 50% equity in my current home, and will rent it out when I move out, (albeit 50% of that cash will go to my dad), can this be taken into consideration by banks when calculating how much they are willing to lend me? i.e count it as income.

2) I really don't want to borrow anything against my current home, as it's my dad's retirement pot. But if I really really wanted to and my dad agreed to it would it be possible to release a small amount equity in my current home, to pay for a deposit for a "2nd Mortgage".

Honestly I think I'm clutching at straws here! It's gonna be either get a bedsit or save more!

Snookie12cat

1. No, banks are not going to take your mortgage free property into your affordability, unless its generating you rent. So, arguably if it were already rented it would prove useful for remortgage purposes but right now, its not going to do anything for you. 

2. Yes, you can remortgage your mortgage free home on a BTL (capital raising is allowed for purchase of property) and release the equity from it and then use that to buy your new home. I am doing this exact thing for my next purchase.

K_S

@Gerontion Firstly I would say that do make sure you have an accurate estimate of your max borrowing so you know what the shortfall is. From my experience, a large proportion of buyers significantly underestimate how much they can borrow.

Yes, you could potentially remortgage you current property into a BTL, release cash and use that cash for an onward purchase to live in. It's called a let-to-buy transaction and plenty of mainstream choices in that area.

Gerontion

Many thanks K_S and Snookiecat, this helps me understand my options considerably.

K_S fear you may be filling me with false hope. In contact with L&C and their online form said £199,000 was my upper bracket based on a £30,000 deposit and my salary  - even this is very tight considering the Stamp Duty alone will wipe out most of the rest of what I've saved. I was looking at the £220K range until I got bumped back down to reality.

I've got an appoint to chat through my options with them tomorrow so hopefully something good will come from that.

Thanks for your help both.

K_S

Gerontion said:

Many thanks K_S and Snookiecat, this helps me understand my options considerably.

K_S fear you may be filling me with false hope. In contact with L&C and their online form said £199,000 was my upper bracket based on a £30,000 deposit and my salary  - even this is very tight considering the Stamp Duty alone will wipe out most of the rest of what I've saved. I was looking at the £220K range until I got bumped back down to reality.

I've got an appoint to chat through my options with them tomorrow so hopefully something good will come from that.

Thanks for your help both.

@gerontion If the adviser doesn't mention it, do ask about Nationwide Helping Hands 5.5x. Due to the way in which Nationwide defines FTBs, assuming you've not held a mortgage (in the UK or overseas) in the last 3 years, and earn over 31k, you potentially qualify for the enhanced multiple subject to meeting other background criteria and affordability. That could bump up your borrowing.

I've had a client-couple where one of them had their name on the deed of a mortgage-free inherited property and still met Helping Hand FTB criteria. They were as surprised as I was!

Gerontion

He didn't and only just seen this! I wanted to be super safe with my savings considering I'm going into the landlord business, so ended up trimming my deposit to £22K and have a AIP for a £170K one bed.

But thank you! The mortgage I was on with my father for my current house was paid off well over two years ago, likely three so may qualify.  

Gerontion

Final quick query, might be worth another thread but you've been incredibly helpful so wanted to keep the conversation going!

About the lending implications of stamp duty. I can afford the higher rate of stamp duty on my second property fine off my own back based on the £160K to £180K price range. But my father is offering to gift me it as he gifted a sibling their stamp duty and it would really help as off my own back at the higher end of what I want, it would leave me without the usual six months of bills you need saved up in case of emergencies. I want to be above board with things, but thinking that my father could gift me an amount the size of the stamp duty after the transactions have been completed and the tax paid, essentially restoring that six months worth of savings after the event and sidestepping some paperwork.

1) Are savings left looked at by mortgage providers so would it harm an application if I only had a few hundred in savings after everything to do with the property purchase had gone through and taxes paid?
2) Relatedly, is the above plan OK or is it not worth it just to sidestep some paperwork?

K_S

1) Based on how you've described it, it's unlikely to be an issue.

Gerontion

Many Thanks!

"Based on how I've described it." Yeah I mean there's gifts and then there's "gifts" in these kind of situations...

In any case, as long as all the costs to do with the property are being paid for by my funds that I can account for, as you say it's irrelevant to the bank if I later receive some money from a family member that we might, or might not, have some kind of understanding about... especially if it was in regards to a prospective future income source we shared that the bank also isn't taking into consideration...

Snookie12cat

Gerontion said:

Final quick query, might be worth another thread but you've been incredibly helpful so wanted to keep the conversation going!

About the lending implications of stamp duty. I can afford the higher rate of stamp duty on my second property fine off my own back based on the £160K to £180K price range. But my father is offering to gift me it as he gifted a sibling their stamp duty and it would really help as off my own back at the higher end of what I want, it would leave me without the usual six months of bills you need saved up in case of emergencies. I want to be above board with things, but thinking that my father could gift me an amount the size of the stamp duty after the transactions have been completed and the tax paid, essentially restoring that six months worth of savings after the event and sidestepping some paperwork.

1) Are savings left looked at by mortgage providers so would it harm an application if I only had a few hundred in savings after everything to do with the property purchase had gone through and taxes paid?
2) Relatedly, is the above plan OK or is it not worth it just to sidestep some paperwork?

I don't believe they will care if you don't have huge savings after the purchase. You will also be able to save more when the purchase goes on.

Try and stay out of gifted deposit territory, so it he can give it to you afterwards it will make your life easier.