Q I live with my partner in a property that we bought three years ago for £200,000. One of my partner’s parents is named on the mortgage along with me as my partner didn’t have a permanent job when we took out the mortgage. The property’s value has increased dramatically since we bought it and, based on what others have sold for in the area, it is now worth around £350,000.
We are hoping to move but would like to keep our property and let it out (my partner’s parent is in agreement with this) as we may decide to move back in a few years.
As we have made a lot of money due to the property market rising, we would ideally like to borrow from our home (current mortgage £165,000) to fund the deposit for another property to live in, say, £25,000 (including £5,000 for moving costs, stamp duty and so on). My partner and I are looking at new properties costing around £160,000. He may be able to get this mortgage on his own, as he has never had a mortgage before, or I could also be named, depending on what was feasible or the easiest option as I’m not sure if owning two properties complicates my position.
We know that we could get a rental income of at least £1,500 per month on our current home, which would cover the 125% needed on most buy-to-let mortgages.
Is this feasible or are we dreaming? Our combined salaries are low but we assume that our current mortgage would be paid for by letting our home out, with enough left over to cover void periods, maintenance and so on, and our new mortgage would be covered by our salaries.
We’re not trying to be greedy but as we may want to move back to our current home in the future it seems to make more sense not to sell it. DB
A What you are planning to do is perfectly feasible and is called “let to buy”. The term refers to the process of turning a home you live in (and own) into a rental property to let to tenants and buying another property to live in. The original residential mortgage on the first property is converted to a buy-to-let mortgage, the cost of which is covered by the rental income, while you take out a residential mortgage on your new home and pay for it out of your salaries.
Looking at the figures, raising £25,000 in cash from your current home by increasing the mortgage to £190,000 on converting it to a buy-to-let mortgage would easily meet the typical requirement that the amount of the loan cannot exceed 75% of the value of the property. And if a valuation agreed with you about the monthly rent of £1,500, you would also easily meet the requirement for the monthly rent to be at least 125% times the amount of the monthly mortgage payment. That assumes either a 25-year repayment or interest-only mortgage with an interest rate of 3.5% which, as you would need a loan of less than 60% of the value of your property, is perfectly achievable.
If the new residential mortgage had a rate of 2.5% – currently available on a limited number of 90% mortgages (which is close to the 87.5% loan you would be taking out on a property costing £160,000) – you would be looking at monthly repayments of just over £715, assuming a 25-year repayment mortgage. Whether that’s affordable on your joint incomes will be assessed by the mortgage lender. If it’s not, you may want to consider taking a larger amount of money from your current home to reduce the size of mortgage you need for your new home.
However, the fact that your partner’s parent is on your current mortgage rather than your partner complicates matters slightly. A let to buy arrangement assumes that the same borrowers are on both the mortgages, which isn’t possible for you.
What would be possible, however, is for you and your partner’s parent to convert the current mortgage to a buy-to-let and for you and your partner to take out a residential mortgage on your new home. A preferable solution would be to ask your lender to allow your partner to replace his parent on the mortgage. This would also simplify his parent’s tax position. With them on the buy-to-let mortgage, they would have to pay tax on their half of the rental income (after tax relief).
However you decide to proceed, it’s worth bearing in mind that you cannot live in a property that has a buy-to-let mortgage on it, so if you did go ahead with getting two mortgages, they would need to be arranged on the same day. It would also be worth looking in detail at your responsibilities as a landlord before you take the plunge. You should also be aware that if you end up owning two properties and you complete on the one you are buying after 1 April 2016, the stamp duty bill will be almost £5,000 higher than the £700 bill for a £160,000 property bought before that date.