Buy to let mortgages

[Leeroy]

We've had our house on the market for 4 or 5 months, with lots of viewings and a few low offers but it's still for sale.

I previously posted about buy to let mortgages but ruled it out due to high deposits required. It seems that these are being reduced and that a depost of 25% may be possible with a 5% interest rate. If this is the case we may be able to buy the house we want AND keep the current one for rental.

If the current house was now worth £220K, we had paid £40K of the mortgage off, and it had increased £40K in value since we bought it, we'd have £80K equity.

We could get about £20K of savings together.

 

As an example for discussion, we'd be looking to spend about £220K on the new house. I'm just a bit confused about how we free up cash for the 2 mortgage deposits.

How does the BTL mortgage work, in terms of deposit etc - would the new mortgage necessitate a 25% deposit of the current value (£220K)? I'm confused about this because it's seems like we'd be buying the house off ourselves for £40K more than we paid for it!

 

All advice appreciated, if possible it would be good to see it laid out as an idiot's breakdown for the BTL (on current house) and standard repayment mortgage (on new house).

 

Cue Sarnie

[HassanZ]

We've had our house on the market for 4 or 5 months, with lots of viewings and a few low offers but it's still for sale.

I previously posted about buy to let mortgages but ruled it out due to high deposits required. It seems that these are being reduced and that a depost of 25% may be possible with a 5% interest rate. If this is the case we may be able to buy the house we want AND keep the current one for rental.

If the current house was now worth £220K, we had paid £40K of the mortgage off, and it had increased £40K in value since we bought it, we'd have £80K equity.

We could get about £20K of savings together.

 

As an example for discussion, we'd be looking to spend about £220K on the new house. I'm just a bit confused about how we free up cash for the 2 mortgage deposits.

How does the BTL mortgage work, in terms of deposit etc - would the new mortgage necessitate a 25% deposit of the current value (£220K)? I'm confused about this because it's seems like we'd be buying the house off ourselves for £40K more than we paid for it!

 

All advice appreciated, if possible it would be good to see it laid out as an idiot's breakdown for the BTL (on current house) and standard repayment mortgage (on new house).

 

Cue Sarnie

 

On my Buy to let mortgage, I had to place a deposit of 30%. The interest rates were slightly higher than a traditional mortgage also.

 

I think what you're planning to do is VERY wise, you will be laughing in the future once you've got 2 properties paid off (the rented one should pay for itself anyway, so there shouldn't be a financial burden on that property, other than the initial deposit.).

 

I would strongly recommend you go for an 'interest-only' mortgage, this will ensure you are not paying more than you can afford on a monthly basis (as you have 2 mortgages) and if anything would happen with your current income, you will not be hit as hard and still be able to cope with the payments. An 'interest-only' mortgage should have very low monthly instalments, your rental income should cover it and give you a small amount of profit on top, allowing you to make over-payments at the end of the year (a lot of mortgage companies allow up to 10% overpayment without being penalised).

[Lincolnbaggie]

I'd PM Sarnie - what he doesn't know isn't worth knowing.

[James B]

I used to think it was all about deposit. If you had it BTL mortgages were easy to get but a friend looked into this recently and turned to be a hell of a lot more complicated than he thought.

 

I don't know this in's and out's of it, so I won't dispense advice however, he talked about the lender wanting details of how much the rental income was relative to the amount lent, disregarding completely that he could cover the additional mortgage on his income on it's own. Sounds bonkers to me but seems there's so much more to it then really there should be.

 

Speak to a proper expert and good luck!

[LRF4N]

I'd PM Sarnie - what he doesn't know isn't worth knowing.

+1 the he's the forum mortgage guru and has been helping me out a lot lately

[Ricey]

We've had our house on the market for 4 or 5 months, with lots of viewings and a few low offers but it's still for sale.

I previously posted about buy to let mortgages but ruled it out due to high deposits required. It seems that these are being reduced and that a depost of 25% may be possible with a 5% interest rate. If this is the case we may be able to buy the house we want AND keep the current one for rental.

If the current house was now worth £220K, we had paid £40K of the mortgage off, and it had increased £40K in value since we bought it, we'd have £80K equity.

We could get about £20K of savings together.

 

As an example for discussion, we'd be looking to spend about £220K on the new house. I'm just a bit confused about how we free up cash for the 2 mortgage deposits.

How does the BTL mortgage work, in terms of deposit etc - would the new mortgage necessitate a 25% deposit of the current value (£220K)? I'm confused about this because it's seems like we'd be buying the house off ourselves for £40K more than we paid for it!

 

All advice appreciated, if possible it would be good to see it laid out as an idiot's breakdown for the BTL (on current house) and standard repayment mortgage (on new house).

 

Cue Sarnie

 

On my Buy to let mortgage, I had to place a deposit of 30%. The interest rates were slightly higher than a traditional mortgage also.

 

I think what you're planning to do is VERY wise, you will be laughing in the future once you've got 2 properties paid off (the rented one should pay for itself anyway, so there shouldn't be a financial burden on that property, other than the initial deposit.).

 

I would strongly recommend you go for an 'interest-only' mortgage, this will ensure you are not paying more than you can afford on a monthly basis (as you have 2 mortgages) and if anything would happen with your current income, you will not be hit as hard and still be able to cope with the payments. An 'interest-only' mortgage should have very low monthly instalments, your rental income should cover it and give you a small amount of profit on top, allowing you to make over-payments at the end of the year (a lot of mortgage companies allow up to 10% overpayment without being penalised).

 

Personally I'd say that advice is a little dangerous Haz but as said.......ask Sarnie for professional, qualified advice.

 

Your confusing yourself by using the term 'deposit'. When you own the property already its simply a case of the having the correct 'loan to value - LTV'. Your talking about doing a capital reduction but again this is a little confusing as you need to pull money out of the current property to fund the deposit on the new one.

 

For example

Current prop value

£220k

Current mortgage

£140k

Savings in bank 20k

 

New property value

£220k

Mortgage max LTV 75%

Max mortgage therefore £165k

Deposit required £55k

 

You have £20k in the bank and therefore require an additional £35k from the equity of £80k in the current residential.

 

There are 2 options

1. Existing mortgage company offer you a 'Further Advance' of £35k (taking total outstanding balance to £175k) - subject to max LTV, lending criteria, affordability critiera, consenting to you letting the property.

2. You remortgage to another mortgage company for a BTL mortgage of £175k (£140k to redeem existing and another 35k for the new purchase).

 

Mortgage companies assess BTL lending on 1 or 2 ways;

1. Rental yield as a % of cover for the installment - eg installment is £500 and rental is £700 you have a 140% rental cover. Lenders might set the threshold at say 125% cover (i.e you need at least 125% cover to get the mortgage you want - based on a RICS qualified surveyors assessment of the projected rental).

2. Based on your income (usually with a deduction of a set % off your income of whatever you residential mortgage balance is)

 

Be sure about being a landlord though mate - it can be an unholy ball ache and don't forget your going to be in for a cool £340k of secured debt. You have tenants who can lose their jobs too, then your stuck making the payments to the mortgage, you are liable to sort all of the damage, ensuring the property is compliant. If its not the council can serve you with improvement notices that they will simply act upon themselves if you fail to comply (then register a landcharge on your property).

 

However - you could end up with a nice little nest egg for retirement and some tasty profit off the tenants.

 

Bottom line SPEAK TO SARNIE

[Sarnie]

We've had our house on the market for 4 or 5 months, with lots of viewings and a few low offers but it's still for sale.

I previously posted about buy to let mortgages but ruled it out due to high deposits required. It seems that these are being reduced and that a depost of 25% may be possible with a 5% interest rate. If this is the case we may be able to buy the house we want AND keep the current one for rental.

If the current house was now worth £220K, we had paid £40K of the mortgage off, and it had increased £40K in value since we bought it, we'd have £80K equity.

We could get about £20K of savings together.

 

As an example for discussion, we'd be looking to spend about £220K on the new house. I'm just a bit confused about how we free up cash for the 2 mortgage deposits.

How does the BTL mortgage work, in terms of deposit etc - would the new mortgage necessitate a 25% deposit of the current value (£220K)? I'm confused about this because it's seems like we'd be buying the house off ourselves for £40K more than we paid for it!

 

All advice appreciated, if possible it would be good to see it laid out as an idiot's breakdown for the BTL (on current house) and standard repayment mortgage (on new house).

 

Cue Sarnie

 

On my Buy to let mortgage, I had to place a deposit of 30%. The interest rates were slightly higher than a traditional mortgage also.

 

I think what you're planning to do is VERY wise, you will be laughing in the future once you've got 2 properties paid off (the rented one should pay for itself anyway, so there shouldn't be a financial burden on that property, other than the initial deposit.).

 

I would strongly recommend you go for an 'interest-only' mortgage, this will ensure you are not paying more than you can afford on a monthly basis (as you have 2 mortgages) and if anything would happen with your current income, you will not be hit as hard and still be able to cope with the payments. An 'interest-only' mortgage should have very low monthly instalments, your rental income should cover it and give you a small amount of profit on top, allowing you to make over-payments at the end of the year (a lot of mortgage companies allow up to 10% overpayment without being penalised).

 

Personally I'd say that advice is a little dangerous Haz but as said.......ask Sarnie for professional, qualified advice.

 

Your confusing yourself by using the term 'deposit'. When you own the property already its simply a case of the having the correct 'loan to value - LTV'. Your talking about doing a capital reduction but again this is a little confusing as you need to pull money out of the current property to fund the deposit on the new one.

 

For example

Current prop value

£220k

Current mortgage

£140k

Savings in bank 20k

 

New property value

£220k

Mortgage max LTV 75%

Max mortgage therefore £165k

Deposit required £55k

 

You have £20k in the bank and therefore require an additional £35k from the equity of £80k in the current residential.

 

There are 2 options

1. Existing mortgage company offer you a 'Further Advance' of £35k (taking total outstanding balance to £175k) - subject to max LTV, lending criteria, affordability critiera, consenting to you letting the property.

2. You remortgage to another mortgage company for a BTL mortgage of £175k (£140k to redeem existing and another 35k for the new purchase).

 

Mortgage companies assess BTL lending on 1 or 2 ways;

1. Rental yield as a % of cover for the installment - eg installment is £500 and rental is £700 you have a 140% rental cover. Lenders might set the threshold at say 125% cover (i.e you need at least 125% cover to get the mortgage you want - based on a RICS qualified surveyors assessment of the projected rental).

2. Based on your income (usually with a deduction of a set % off your income of whatever you residential mortgage balance is)

 

Be sure about being a landlord though mate - it can be an unholy ball ache and don't forget your going to be in for a cool £340k of secured debt. You have tenants who can lose their jobs too, then your stuck making the payments to the mortgage, you are liable to sort all of the damage, ensuring the property is compliant. If its not the council can serve you with improvement notices that they will simply act upon themselves if you fail to comply (then register a landcharge on your property).

 

However - you could end up with a nice little nest egg for retirement and some tasty profit off the tenants.

 

Bottom line SPEAK TO SARNIE

 

 

Do you want a job?

 

All of the above is accurate. However there are still many many pitfalls to BTL mortgages as opposed to residential lending. Almost every lender has there own criteria to satisfy. Northern Rock for example require you to have six months worth of mortgage payments sitting in an account as a contingency fund.

 

Some will require you to have had tennant for six months before lending to you. Also the reason for the extra borrowing will rule out some lenders............

 

It's a minefield

[Leeroy]

Awesome, thanks for the great advice guys. The process of freeing up capital for the new purchase makes more sense now.

Ricey's 'further advance' option looks good as we've got a low tracker on our current mortages and would like to retain it (1% over base rate). If we did this though, would the mortgage be classed as BTL or resi, and does that affect the mortgage on the second house - ie would we get a mortgage on the new house if we already have a resi mortgage (albeit agreed with current lender that it's a rental)?

 

Hope this makes sense

[Ricey]

Awesome, thanks for the great advice guys. The process of freeing up capital for the new purchase makes more sense now.

Ricey's 'further advance' option looks good as we've got a low tracker on our current mortages and would like to retain it (1% over base rate). If we did this though, would the mortgage be classed as BTL or resi, and does that affect the mortgage on the second house - ie would we get a mortgage on the new house if we already have a resi mortgage (albeit agreed with current lender that it's a rental)?

 

Hope this makes sense

 

From a regulatory perspective it will probably remain as a resi with a consent to let granted.

 

In respect of the new mortgage - yes it probably will impact your ability to lend. Pre-recession it didn't so much but now lenders have throttled their criteria.

 

For example I've never missed a payment on anything in my life.......without our btl we can borrow about 200k from our existing mortgage company (as we're on a really low tracker too)....with it we're restricted to just over 100k - which is less than our current mortgage the worlds gone mad.

 

When we do come to move it looks like we'll have to hassle Sarnie to work his magic on a new deal.....unless we offload the btl by that point.

[HassanZ]

BTL is easier to get than a residential mortgage as they take the rental income into consideration, thus being handy when having more than one mortgage to handle. Some people would get declined when applying for a second mortgage as their income is not high enough to cope with 2 mortgages at the same time.

 

When renting out the house, I'm sure you have to take out a BTL mortgage?? It's not optional is it? Even though plenty of people still take out a residential mortgage and hide the fact they are renting it out.

 

I'm only 23 and don't have much experience with mortgages, so I may be incorrect! I'm still in the process of learning as I go along...

[Sarnie]

Awesome, thanks for the great advice guys. The process of freeing up capital for the new purchase makes more sense now.

Ricey's 'further advance' option looks good as we've got a low tracker on our current mortages and would like to retain it (1% over base rate). If we did this though, would the mortgage be classed as BTL or resi, and does that affect the mortgage on the second house - ie would we get a mortgage on the new house if we already have a resi mortgage (albeit agreed with current lender that it's a rental)?

 

Hope this makes sense

 

From a regulatory perspective it will probably remain as a resi with a consent to let granted.

 

In respect of the new mortgage - yes it probably will impact your ability to lend. Pre-recession it didn't so much but now lenders have throttled their criteria.

 

For example I've never missed a payment on anything in my life.......without our btl we can borrow about 200k from our existing mortgage company (as we're on a really low tracker too)....with it we're restricted to just over 100k - which is less than our current mortgage the worlds gone mad.

 

When we do come to move it looks like we'll have to hassle Sarnie to work his magic on a new deal.....unless we offload the btl by that point.

 

You just have to know which lenders to approach. There are plenty of high street lenders who will ignore BTL's in the background as long as they can be evidenced as 'self financing', therefore freeing you up to lend as much as you need/can for your residential purchase.

[Sarnie]

Awesome, thanks for the great advice guys. The process of freeing up capital for the new purchase makes more sense now.

Ricey's 'further advance' option looks good as we've got a low tracker on our current mortages and would like to retain it (1% over base rate). If we did this though, would the mortgage be classed as BTL or resi, and does that affect the mortgage on the second house - ie would we get a mortgage on the new house if we already have a resi mortgage (albeit agreed with current lender that it's a rental)?

 

Hope this makes sense

 

You can have as many residential mortgages as you want, as long as your income is suffiecient to support them

 

Also, the lender is unlikely to grant you Consent to Lease, allow you to ramp up the LTV AND let you keep your base+1% rate........from their point of view you are a substantially higher risk now.

[Sarnie]

BTL is easier to get than a residential mortgage as they take the rental income into consideration

 

I wish they were.

 

When renting out the house, I'm sure you have to take out a BTL mortgage?? It's not optional is it? Even though plenty of people still take out a residential mortgage and hide the fact they are renting it out.

 

The only option you have is to ask your current lender for 'Consent to Lease', otherwise it's a BTL product you need. If you rent out your property on a residential mortgage, don't expect any sympathy from the lender or the courts if it goes tits up.

I'm only 23 and don't have much experience with mortgages, so I may be incorrect! I'm still in the process of learning as I go along...

[CaptainSensible]

I would add a note of caution about investing heavily in property at the moment.

 

House prices have been buoyed by extremely low interest rates over the last 3 years. Yet despite this house prices hare still well below their peak. Why? The answer is availability of credit, or lack of. Most high street banks are still in the process of recapitalising and repairing their balance sheets following the financial crisis. They only want to lend to people with healthy deposits, who they percieve to be a safer bet, but this is restricting demand for property.

 

That's why house prices have slid a little in the last few years, however there could be more to come. When interest rates start to rise, which they almost certainly will over the next couple of years, so will mortgage repayments for anyone who isn't on a fixed rate.

 

You need to honestly ask yourself if you could still afford the mortages on both properties if interest rates were 2-3% higher thna today (or even more). Also think about what impact higher interest rates will have on the housing market and house prices. There's a lot of downside risk on property at the moment in my view.

[Ricey]

I would add a note of caution about investing heavily in property at the moment.

 

House prices have been buoyed by extremely low interest rates over the last 3 years. Yet despite this house prices hare still well below their peak. Why? The answer is availability of credit, or lack of. Most high street banks are still in the process of recapitalising and repairing their balance sheets following the financial crisis. They only want to lend to people with healthy deposits, who they percieve to be a safer bet, but this is restricting demand for property.

 

That's why house prices have slid a little in the last few years, however there could be more to come. When interest rates start to rise, which they almost certainly will over the next couple of years, so will mortgage repayments for anyone who isn't on a fixed rate.

 

You need to honestly ask yourself if you could still afford the mortages on both properties if interest rates were 2-3% higher thna today (or even more). Also think about what impact higher interest rates will have on the housing market and house prices. There's a lot of downside risk on property at the moment in my view.

 

To be honest the whole economy from that respect is absolutely TERRIFYING.

 

Its old news for the media now so they're busy banging on about killer cucumbers and bean sprouts or volcanos - the reality is this country is sitting on a time bomb (and by time bomb I mean Trident Thermonuclear Missile).

 

Mortgage lenders are being nailed to the wall for Arrears handling so repossessing someone is a lot more difficult now as you have to evidence that you've explored all reasonable alternatives. Interest rates are at a record low yet people are still struggling. Worse than that is all the people who aren't struggling and in fact have found themselves better off.....they've gone out and cut their cloth accordingly.

 

In both instances if interest rates rise by even 2% I think we could be seeing total fricking meltdown. We have an entire generation of people who have lived in the never-never and are hocked up to the nines without the means to support it.

 

Putting into context of Leeroy - lets say you manage to do these do deals and gear up to £175k on existing property and £165k on new property. You've got a tracker rate of BBR plus 1% on existing and lets say a 5% tracker on the new one. You keep existing on interest only (if indeed your lender will let you - interest only is well and truly on the regulator radar at the moment) and take new one on repayment over 25 years.

These are your approx payments;

New Resi - £965

Existing now on BTL - £218.

 

Bank base rate rises by just 2%

New Resi - £1166

Existing now on BTL - £510.42

 

Thats an extra £493 per month please (granted this is all hypothetical and you could fix your rate ETC)................also imagine what the payments would be like if you couldn't get the interest only agreed on the BTL and you had to go on repayment!.

 

Back in the day (times might of moved on - Sarnie knows best - this is just my experience) you had to get whats called a 'Let to Buy' on the new property - this was a very specific product for people retaining their existing home to let out and moving to a new residential. It carried more stringent criteria and a % deduction off your income. I'm sure there are other options out there though (my experience is in the niche markets not the high street).

 

Think long and hard bud..........it could be a bumpy ride the next decade or so - if you want my tuppence (opinion based on not very much) I can't see how interest rates can rise in the short/mid term - an entire generation of those who lent irresponsibly and those who got caught up in the aftermath would practically collapse if they did.

[Ozz]

My parents are doing a btl now, they are signing an agreement with a private housing association for a 3 year rental agreement. My parents get paid even if the property is empty and they got pretty much market rental rate. I've not seen the T&Cs and I'd certainly want some clauses like 6 month notice but from how they've described it it suits them perfectly (they are happy to tie up second property for 3 years).

 

Food for thought. We're having legal issues with our property which is delaying us selling so I'm considering renting the lot out and getting somewhere else as we have about 20% LTV atm.

[Ricey]

My parents are doing a btl now, they are signing an agreement with a private housing association for a 3 year rental agreement. My parents get paid even if the property is empty and they got pretty much market rental rate. I've not seen the T&Cs and I'd certainly want some clauses like 6 month notice but from how they've described it it suits them perfectly (they are happy to tie up second property for 3 years).

 

Food for thought. We're having legal issues with our property which is delaying us selling so I'm considering renting the lot out and getting somewhere else as we have about 20% LTV atm.

 

Lenders can get very twitchy about that if they find out about it - in fact they need to check their conditions within the mortgage to see if there is one about something along the lines of 'Solicitors are to confirm that a 6-12 month Assured Shorthold Tenancy Agreement is in place within 30 days of completion).

 

Sounds silly because its guaranteed money but they don't like it because if they have to repossess for some reason it becomes very difficult when a 3rd party has a 3 year agreement.

[Leeroy]

Thanks for the info everyone

We've looked into taking on an additional mortgage with the building society and the numbers stack up nicely.

They suggested that we could apply for consent to let, which looks like the best option for us at the moment, especially if we can keep our tracker.

I've read that the first £10K of CGT is tax free and that CGT isn't applicable if we go consent to let and sell within 3 years. Can anyone one expand on the tax side of things if we sell the rental property further down the line, and whether there is any other tax relieft available?