General Advice - Let-to-Buy to fund New House - Thoughts needed

Logan99

Would appreciate any advice thoughts on the below.

We have a house 10 yrs left on Mortgage (100K on 280k Property)

• 22k in debt

• Zero savings

• Joint income 82k

• 2 children

Both of us it's fair say have been terrible with money and are trying to learn.

My partner is desperate to get a bigger house and suggests we:

• Re-mortgage our existing house on a let to buy

• Use some of the equity on that to pay off the debts

• Use remaining equity to buy a 500k house on the longest mortgage we are allowed to minimise monthly payments

• Use the existing house rental income as second income to offset some of raised mortgage costs

It's fair to say I'm risk averse (and for full disclosure happy enough with the existing house) and for me this sounds like paying off debt by getting into even more debt and fear the figures wont stack up.

My partner (who has been keen for some years to move on to bigger house and a new start) says it’s a way out of debt to a brighter future and means we will have another asset and income stream.

I'd like to believe it, and want to make the positive choice and make them happy - but I am unsure.
I think we should hunker down and pay off debts - but my partner says that will take too long and we've waited too long already to move. 

I'm not saying either of our approaches is better - as we're both poor with money and just have different idea - but I am keen to make the right decision so we can both be happy yet secure.

Any thoughts if this strategy could work and any thoughts in general?

catlady1234

If you are thinking about having a rental property in your personal name, you need to very carefully think about the numbers.

Section 24 refers to UK tax law changes (Finance Act 2015) that significantly reduced mortgage interest relief for individual buy-to-let landlords, replacing it with a 20% basic rate tax credit; this means landlords are taxed on their full rental income, not profit after interest, making it harder for higher-rate taxpayers to offset costs and potentially increasing their tax bill. 

You also have the likelihood that you will be paying increased stamp duty as you are increasing the number of properties owned (this is £40k vs £15k if you just moved house). 

To get a competitive deal on your buy-to-let you would need to leave around 25% equity in the original property (i.e. £70k), this leaves £110k equity for new property but after solicitor fees, stamp duty, this would materially reduce and likely not leave enough for you to be able to get a mortgage for the new property at £500k price. 

This is before you even consider all of the new regulations coming in from 1 May with the Renters Rights. 

JM68

Not an expert but I think the sums are unlikely to stack up. Most BTL mortgage products will lend you up to 75% of your equity, so maybe around £210k. From this you would need to deduct the existing mortgage (plus any early payment/conversion fees), your debts and the costs of buying a new house, including stamp duty and other moving costs. That would not give you a huge sum as a deposit and you would need a pretty big mortgage. The rental payments on the old house would have to cover the BTL morgage payments, wear, voids, tax, etc. so unlikley that there will be much left after that to help pay a big new mortgage (assuming you can get one). Lastly, if you have no savings and £22k in dept while paying a smaller mortgage (and running costs of a smaller house) that is probably not a good indicator of whether you will be able to manage the additional costs of a new bigger house and mortgage with prob not much other than your salaries.

sammyjammy

Pay down your debt, get some savings behind you and then buy a bigger house.  The way you propose is madness, particularly given you admit you are both poor with money and mention nothing about learning any financial lessons regarding that?

ButterCheese

I'd agree with the above.  you have a joint income that's above the national average, but have 22k of debt and no savings.  That's no safety net.  The way you describe your partner is "desperate for a bigger house" is possibly not the best reason to get a bigger house now.  Also kids tend to get more expensive the older they get (clubs, lunch money, being taxi for them etc etc) so I can't see your lifestyle becoming any cheaper any time soon.  I'd absolutely not be considering this if it were me.  That's just my 2p worth

Bigphil1474

It is possible to be a 1 property landlord, but it's not easy. My lad has a property he rents out through an agency and the rent basically just covers his mortgage, but that's about all. It was a new house 20 years ago, so things have started to need replacing. He had to pay £4k in repair costs just last year. He puts all the money left over after the mortgage payment into an account and it is all ring fenced for house maintenance. He's in the military so it's a little bit different. 

As others have said, your financial history isn't great. Our household income is half yours and we have no debts beyond the mortgage and we have 6 months income set aside for emergencies. Obviously, you can live your life as you want to, but if you are in debt with one mortgage and one house to look after, how will you manage with 2 plus a rented property that might be empty some of the time, might need big repair jobs funding etc. I wouldn't want it. When it's empty, it's not just that the income stops, but you also have to start paying out as well - council tax, energy, water bills etc. And after all that, when you sell up, you'll be paying a fair chunk of tax through capital gains. And the new home you buy will be subject to the higher rate of stamp duty, which for a £500k house would be £40k as opposed to the £15k you'd pay if you were replacing your existing home. 

EssexHebridean

OK - so right now you have consumer debt, yes? Loans, Credit cards, that sort of thing? If that debt is all unsecured, then right now, if you are unable to pay, the worst that is likely to happen is that you will get a few nasty letters, some stroppy phone calls, and vague and empty threats about legal action. if however you take on further secured debt to clear off that consumer debt, the debt doesn't go away, it moves, and hides, and  makes you feel "safe" because there aren't lots of DDs going out every month. The flip side on that though is that if you then find yourself unable to pay, you are in a far worse position. 

This is consolidation by any other name - and consolidation almost never works, it's just kicking the can down the road. The vast majority of folk who consolidate end up in far more debt down the line, because they've never solved the root causes behind the debt. if your debt has even in part been accrued due to a "keeping up with the Joneses" lifestyle, then you ned to put the brakes on now, and deal with it while it is still relatively easy. 

IMO what you should do:
- Complete the SOA we advise on Debt Free Wannabe - fill it in accurately and completely, making sure the figures you think you pay for food and clothing in particular are accurate.
- use that SOA to inform a monthly budget to stick to going forwards. It should give you a surplus figure for the end of each month - you need to be sure that you actually have that surplus, and if not, work out where it is going.
- Use your monthly surplus to start attacking that debt - choose the debt with the highest interest rate to pay off first, and once that is clear, move to the next highest.
- While paying off keep an eye for 0% balance transfer deals you can utilise to keep interest rates low.

Once the debt is clear and you have lived for a year without needing to utilise any further credit, then you will be in a position to consider whether you actually want to move, and you will be able to do that without saddling yourselves with a rental property (that you are by the sound of it ill-prepared to manage - AND at possibly the worst time ever to be becoming a landlord) and without starting life in your new home with the sort of debt in the background that will leave you with an uneasy feeling every time the direct debits go out. 

Edit to add: You've been in the position of having debt now for a lot of years, and this isn't the first time you've had the conversation about changing houses at a time when really, it would be a foolish move. You have the option right now to treat this as the lightbulb moment that will improve your day to day lives immeasurably - if you need help and support with this, the DFW board will be ready and waiting. 

saajan_12

The numbers don't really stack up.

BTL: 
BTL mortgage = 210k (max 75% LTV)
Pay off current mortgage = -100k
Pay off debt = -22k
SDLT on new property = -40k (500k property, second home rates)
Solicitor & survey fees = -3k (minimally)
Leaves 210 - 100 - 22 - 40 - 3 =  45k for a deposit. 

Residential mortgage:
45k / 500k = 9% deposit or 91% LTV mortgage, which is rare. 
455k mortgage needed ie 5.5x joint income, which is again over affordability criteria. 

Monthly payments: 
What rent do you expect from the BTL? From that I'd deduct for mortgage, tax, voids, repair costs, agent costs (or if you do it yourself then its still work, you could earning from a part time job). Would there even be anything left over to overpay your residential mortgage? If its a repayment BTL mortgage then you be negative cashflow, plus you have no buffer savings to pay for a major repair for 2 properties. 

Alternative: 
Sell this house, pay off debts and buy a larger house. That releases an extra 95k equity (70k equity left in the BTL and 25k less stamp duty) which could reduce your new mortgage and hence bring the monthly payments to less even without the subsidy from the rent. Plus the LTV and affordability might actually become numbers that get approved. 

In either case, you need towork out why you've accrued the other debts and address those. If you pay them off with the house, you effectively open up the lines to borrow more which could make things worse not better. 

Logan99 said:

Would appreciate any advice thoughts on the below.

We have a house 10 yrs left on Mortgage (100K on 280k Property)

• 22k in debt

• Zero savings

• Joint income 82k

• 2 children

Both of us it's fair say have been terrible with money and are trying to learn.

My partner is desperate to get a bigger house and suggests we:

• Re-mortgage our existing house on a let to buy

• Use some of the equity on that to pay off the debts

• Use remaining equity to buy a 500k house on the longest mortgage we are allowed to minimise monthly payments

• Use the existing house rental income as second income to offset some of raised mortgage costs

It's fair to say I'm risk averse (and for full disclosure happy enough with the existing house) and for me this sounds like paying off debt by getting into even more debt and fear the figures wont stack up.

My partner (who has been keen for some years to move on to bigger house and a new start) says it’s a way out of debt to a brighter future and means we will have another asset and income stream.

I'd like to believe it, and want to make the positive choice and make them happy - but I am unsure.
I think we should hunker down and pay off debts - but my partner says that will take too long and we've waited too long already to move. 

I'm not saying either of our approaches is better - as we're both poor with money and just have different idea - but I am keen to make the right decision so we can both be happy yet secure.

Any thoughts if this strategy could work and any thoughts in general?

HelenNoreen

Logan99 said:

Would appreciate any advice thoughts on the below.

We have a house 10 yrs left on Mortgage (100K on 280k Property)

• 22k in debt

• Zero savings

• Joint income 82k

• 2 children

Both of us it's fair say have been terrible with money and are trying to learn.

My partner is desperate to get a bigger house and suggests we:

• Re-mortgage our existing house on a let to buy

• Use some of the equity on that to pay off the debts

• Use remaining equity to buy a 500k house on the longest mortgage we are allowed to minimise monthly payments

• Use the existing house rental income as second income to offset some of raised mortgage costs

It's fair to say I'm risk averse (and for full disclosure happy enough with the existing house) and for me this sounds like paying off debt by getting into even more debt and fear the figures wont stack up.

My partner (who has been keen for some years to move on to bigger house and a new start) says it’s a way out of debt to a brighter future and means we will have another asset and income stream.

I'd like to believe it, and want to make the positive choice and make them happy - but I am unsure.
I think we should hunker down and pay off debts - but my partner says that will take too long and we've waited too long already to move. 

I'm not saying either of our approaches is better - as we're both poor with money and just have different idea - but I am keen to make the right decision so we can both be happy yet secure.

Any thoughts if this strategy could work and any thoughts in general?

I'd suggest going back and re-reading the thread from 8 years ago, when you were considering buying a 500K property then..  

Logan99

Thankyou so far everyone for your comments and for taking the time to advise. It is much appreciated. Again I'm the first to admit  when it comes to money and numbers in general I have a mind of fog, so appreciate your patience.

I think our first move will be to seek a third party financial adviser to help us plan properly and guide us both on what is would be an acceptable level risk and what isn't and ways to budget long term to steady the ship.

Finding one for general advice and planning is not as easy as it seems, the first few were not keen to proceed after they realised our (lack of) means.   I've found the banks/BS will advise on "products" but not the genuine affordability.

Again, many thanks for your time.

poseidon1

HelenNoreen said:

Logan99 said:

Would appreciate any advice thoughts on the below.

We have a house 10 yrs left on Mortgage (100K on 280k Property)

• 22k in debt

• Zero savings

• Joint income 82k

• 2 children

Both of us it's fair say have been terrible with money and are trying to learn.

My partner is desperate to get a bigger house and suggests we:

• Re-mortgage our existing house on a let to buy

• Use some of the equity on that to pay off the debts

• Use remaining equity to buy a 500k house on the longest mortgage we are allowed to minimise monthly payments

• Use the existing house rental income as second income to offset some of raised mortgage costs

It's fair to say I'm risk averse (and for full disclosure happy enough with the existing house) and for me this sounds like paying off debt by getting into even more debt and fear the figures wont stack up.

My partner (who has been keen for some years to move on to bigger house and a new start) says it’s a way out of debt to a brighter future and means we will have another asset and income stream.

I'd like to believe it, and want to make the positive choice and make them happy - but I am unsure.
I think we should hunker down and pay off debts - but my partner says that will take too long and we've waited too long already to move. 

I'm not saying either of our approaches is better - as we're both poor with money and just have different idea - but I am keen to make the right decision so we can both be happy yet secure.

Any thoughts if this strategy could work and any thoughts in general?

I'd suggest going back and re-reading the thread from 8 years ago, when you were considering buying a 500K property then..  

So from what I can see of the 2018 thread, OP's financial position is unchanged or worsen (?) since then -

https://forums.moneysavingexpert.com/discussion/5888255/partner-wants-much-bigger-house#latest

If mortgage was £100k in 2018, and remains £100k  7+ years later, suggests this is an interest only mortgage so no additional equity being created via capital repayments.

 Begs the question what was/is the plan to pay off the £100k at the end of the next 10 years? Perhaps that should be the couple's primary  focus at this time, rather than the fantasy that a bigger house can change the fundamental dynamics of the underlying problems here.