Can I use equity from 1 house to buy another??

titewad_2

I realise I am probably clutching at straws here but here goes.
My dream house has just come back on the market.I originally offered the asking price of £65k in June 2003 (sealed envelope bids)and was unsuccessful.I was very naive back then and didn't really realise what was happening to house prices as we were cocooned in our council rented house.Well as everyone is aware,prices went stupid.Especially so in my area.I live in a dirty steel town in the north of England where prices were very reasonable,however average wages are not that great,15k is considered good.However its not that good when the average semi is now £135k (research shows they were approx £44k pre boom)
Anyway this house is now back on at £119,500. I earned approx £18k last year including bonuses and overtime so I know I can't afford it as a normal buy.
When we lost out on that house and a few others after,I realised what was happening to house prices,realised we were not able to buy anything suitable for us so I was forced to buy our council house.Got a discount on it but truth is we hate it here,far too small,not the greatest area and surrounded by neighbours we can't stand,sob sob!!
After deposit I borrowed £25k and opted for 8year term.Now 4 months into mortgage.Current value is arround £75k but we can't sell it for three years or we will have to pay the council back the discount(24k) We are allowed to rent it out though and rental should cover the mortgage(£320 a month) but not insurances,so I am wondering if there is a lender who would take into account this and be prepared to lend to buy the other property.I have savings that would pay off the original mortgage,also no other debt besides the mortgage, but am thinking this would be better suited to be a deposit for the "dream house" so as to minimise the prospective lenders risk..So basically what's my chances???

Apologies for the length of post,I just tried to get everything I thought was relevant 1st time rather than have to post to many answers later on.

chitty

I'm not expert on mortgages but can you not convert the loan on the existing property into a buy to let loan? Which in effect is what it would be ..

just a though

lisyloo

In general, no a lender would not be willing to take part of an already mortgaged property as a deposit.

Your equity is currently "paper money" i.e. you don't have the cash you just have something that's worth something on paper.
For a deposit you need real money.

One way to do this would be to increase the mortgage on the council property to use as a deposit for the next one.
The problem is then that your mortgage payments are higher.

BTW - when renting out, dont forget that you might have voids (empty property and no tenant) plus you have to pay for repairs and upkeep.
Successful landlords factor all this into their calculations.

abc

There are certainly lenders that will ignore the mortgage payments on your first property if you rent it out and the rent covers the mortgage payments. I think the Chelsea Building Society is one example. I think they will lend up to 4x income if borrowing less than 75% of the property value. They have a Cashback Plus mortgage which gives you a 6% cashback on the amount borrowed. It's probably not the greatest interest rate in the world but is a useful product if initial funds are tight.

I'm not sure if this would work as I don't know the rules re council house purchase, but could you not remortgage with a buy to let mortgage for say £50,000 over a longer term or an interest only basis thereby releasing another £25,000 of the capital and reducing the monthly payments. (When your 3 years was up you could if you no longer wished to be a landlord sell up to repay the mortgage and release the rest of the equity).

The £25,000 equity released through the buy to let mortgage and your savings mentioned of around the same amount would give you a £50,000 deposit meaning you would need mortgage of £69,500 for the new property which in theory could be workable.

Another alternative suggestion would be is the new property lettable? Could you purchase it using your savings as a deposit as a buy to let property. It depends on the rental figures amongst other things. Continue to live in your existing house knowing that in 3 years time you will be able to sell your existing home and remortgage the new home as a normal residential mortgage and move in. If you were really really lucky and property prices had continued to rise the equity in the ex-council house might pay off most (or hopefully all) of the buy to let loan meaning you only needed a small (or hopefully no) mortgage. This plan would mean staying put for the next 3 years but maybe you might consider it worth it if you were going to get your dream home at the end of it.

titewad_2

Thanks to those that have replied upto now.There's certainly some food for thought there.I did enquire about a buy to let mortgage of around the amount I would need for the 2nd property but this doesn't appear viable as it seems it is determined by a valuers idea of what the rental income would be,and in the area I live this would not meet the repayments with the deposit I have.Besides that I would not actually want to rent this property out.It is our "dream house " for now,not three years time.We have two children of 13 (son)and 11 today (daughter).Both are hyperactive,youngest (just) has ADD, whereas oldest Has ADHD as well as Dispraxia and Aspergers Autism.Their bedrooms are smaller than most peoples garden sheds.Our son doesn't even have a full length bed in his room (5ft) and he already stands past my shoulder(I am 6ft 4") We have no garden to speak of,they have no room to play without being underfoot and our house is generally just busting at the seams,before the difficulties that their respective conditions bring.
I appreciate the advice about releasing aprprox £25k from buy to letting the ex-council house but as we are only 3/4 months into this mortgage I am not entirely sure if this is an option.I also opted for an 8yr term over the traditional 25yrs as i want to pay as little as possible for it overall( i have even made four £500 overpayments) as even after discount we paid as much if not more than it was worth two years ago.The idea was to be landlords for the time only that we were liable for repaying the discount,then sell and use the proceeds to reduce the amount on the "dream house"
We desperately want to be away from this house,are their not any other options available to me??

titewad_2

lisyloo wrote:

In general, no a lender would not be willing to take part of an already mortgaged property as a deposit.

Your equity is currently "paper money" i.e. you don't have the cash you just have something that's worth something on paper.
For a deposit you need real money.

One way to do this would be to increase the mortgage on the council property to use as a deposit for the next one.
The problem is then that your mortgage payments are higher.

BTW - when renting out, dont forget that you might have voids (empty property and no tenant) plus you have to pay for repairs and upkeep.
Successful landlords factor all this into their calculations.

If i was to pay the mortgage off in full,or leave a balance of a pound,then come up with a deposit aswell,is it likely that I could then secure a mortgage for the second property on the value of this.One mortgage but in effect the building society having a double safety net if i were to default

Jo_anne_2

You could look into getting a 'further advance' on your current property, which although it is secured against your home it can be used for buying a second property. We got one from Nationwide in order to buy a property we let out, with the advantage we get a better interest rate than we'd have got on a BTL mortgage. Just a thought.