Using existing home equity to buy a new home?

caprimad

Hi,

I own a property worth about £200k mortgage-free.

If I wanted to move, but I wanted to keep the house I've already got (and rent it out), can I use the equity I have in it as a "deposit" on the new house? If yes - how would that work?

As an example, Halifax reckon I can borrow up to about £385k; so if I sell this house & put a £200k cash deposit down, I can reasonably confidently buy a £550k house.

Could I still buy that £550k house if I kept this one, or would I be limited to £385k?

amnblog

That depends on what the plan is. 

If your deposit is cash and you intend to let the current property and live in the new one, no problem.

MWT

caprimad said:

Could I still buy that £550k house if I kept this one, or would I be limited to £385k?

Unless I've misunderstood something then no, you could only release about 75% of the value of your existing property with a BTL mortgage, so you'd come up a little short but still well beyond £385k

kingstreet

You used to be able to "cross-charge" where a lender would lend for you to buy a new property using both the existing and new properties as security. Sadly, that option is long gone so as MWT says, you would need to remortgage current property to raise part of the purchase funds for property two. Don't forget second property SDLT surcharge as well!

Veteransaver

No, you'd need to remortgage the current property, take the cash and use that as deposit on the new house.
This would mean having 2 mortgages which could cause lots of affordability issues when Halifax reassess you, so they likely wouldn't lend you £385k now you have another mortgage of maybe £160k on the first property.
You could maybe get a BTL mortgage on the first property but rates will likely be higher.
Why not just sell the first house? What's your earnings situation, if Halifax are offering to lend £385k then I would assume you are most definitely a high rate tax payer? Owning a BTL with a large mortgage isn't usually a great proposition if you are a high rate tax payer as you don't get full mortgage interest relief. And most rental income is potentially taxed at your highest tax rate too. So unless you can attract a super rental income you will likely be haemorrhaging cash.
And then CGT issues etc if you sell up.

caprimad

amnblog said:

That depends on what the plan is. 

If your deposit is cash and you intend to let the current property and live in the new one, no problem.

I'd have to remortgage my existing property to get a £200k cash deposit (or £150k, based on 75% LTV). Would that mortgage payment - even if the majority of it was covered by rental income - reduce the amount a lender would lend me? I'm assuming "yes".

caprimad

Veteransaver said:

No, you'd need to remortgage the current property, take the cash and use that as deposit on the new house.
This would mean having 2 mortgages which could cause lots of affordability issues when Halifax reassess you, so they likely wouldn't lend you £385k now you have another mortgage of maybe £160k on the first property.
You could maybe get a BTL mortgage on the first property but rates will likely be higher.
Why not just sell the first house? What's your earnings situation, if Halifax are offering to lend £385k then I would assume you are most definitely a high rate tax payer? Owning a BTL with a large mortgage isn't usually a great proposition if you are a high rate tax payer as you don't get full mortgage interest relief. And most rental income is potentially taxed at your highest tax rate too. So unless you can attract a super rental income you will likely be haemorrhaging cash.
And then CGT issues etc if you sell up.

Yeah, that was my worry.... and as you say, I know the regulatory/tax environment is now extremely hostile to private landlords. You correctly surmise I'm a higher rate taxpayer.

Based on this, I'd likely go for the selling up option.

Thanks all!

Hoenir

caprimad said:

Veteransaver said:

No, you'd need to remortgage the current property, take the cash and use that as deposit on the new house.
This would mean having 2 mortgages which could cause lots of affordability issues when Halifax reassess you, so they likely wouldn't lend you £385k now you have another mortgage of maybe £160k on the first property.
You could maybe get a BTL mortgage on the first property but rates will likely be higher.
Why not just sell the first house? What's your earnings situation, if Halifax are offering to lend £385k then I would assume you are most definitely a high rate tax payer? Owning a BTL with a large mortgage isn't usually a great proposition if you are a high rate tax payer as you don't get full mortgage interest relief. And most rental income is potentially taxed at your highest tax rate too. So unless you can attract a super rental income you will likely be haemorrhaging cash.
And then CGT issues etc if you sell up.

Yeah, that was my worry.... and as you say, I know the regulatory/tax environment is now extremely hostile to private landlords. 

BTL is no different to running any business.  Those that it get it badly wrong are generally ill-equipped and uninformed. There's no easy was way other than to perform your homework properly before venturing into property letting. . 

housebuyer143

caprimad said:

amnblog said:

That depends on what the plan is. 

If your deposit is cash and you intend to let the current property and live in the new one, no problem.

I'd have to remortgage my existing property to get a £200k cash deposit (or £150k, based on 75% LTV). Would that mortgage payment - even if the majority of it was covered by rental income - reduce the amount a lender would lend me? I'm assuming "yes".

It's called 'let to buy' and is very common. You remortgage the current house onto BTL and that mortgage payment shouldn't be taken into account for affordability. You then use that £150k you released to buy the new property on residential mortgage.

Keep_pedalling

Assuming you are in England keeping the existing house would cost you an additional £27.5k in SDLT on a £550k purchase.

kingstreet

Veteransaver said:

This would mean having 2 mortgages which could cause lots of affordability issues when Halifax reassess you, so they likely wouldn't lend you £385k now you have another mortgage of maybe £160k on the first property.

Most lenders will ignore a let property/mortgage as long as it's self-financing. This can be evidenced with a copy of the mortgage offer and a rental income estimate from an ARLA registered letting agent.