Can I borrow against my existing flat to buy another?

[lastexile69]

Hi all

I have a nice one bed flat that I own, fully mortgage free, that at last EA valuation (before everything went weird of course) was at approx £85k. The monthly rent figure the same EA estimated I could put it out at was about £450 pcm in the location.

I want to move and have spotted a different larger flat that would give us a second bedroom (finally!) which is listed at £169k (brand new, so no chain).

I would very much like to hang on to the existing property and put it onto the rent market, which is very active where I live (selling market for one bedroom flats is very slow even before all this).

We also have about 20k saved.

I would imagine a good chunk of that 20k savings would go on fees and stamp duty but some of it should be able to help with my collateral position wouldn't it?

Could anyone in the mortgage game advise me if I can borrow enough against the first property to make the £170k purchase and still hang on to my existing flat, or will I be forced to wait and try to sell it (which I have to be honest, could take years given past market performance for 1 bed flats in my local area)?

I've read that I could remortgage against the first flat rather than borrow all of the new flat's purchase price, but I am a total noob with money and would appreciate any advice anyone could give as to the most efficient way to do this (assuming that it is possible for me to hang on to the first flat).

Thanks in advance.

[Sarnie]

Yes, it's called a Let-To-Buy mortgage.................you can lend up to 75% of your flats value to fund the deposit for the onward purchase and mortgage the rest.

[Pothole]

Sarnie said:

Yes, it's called a Let-To-Buy mortgage.................you can lend up to 75% of your flats value to fund the deposit for the onward purchase and mortgage the rest.

Do you mean borrow?

[lastexile69]

Ah, OK.

So we could borrow £63750 against my existing flat (and keep it to rent out) and additionally borrow £106250 against the new property?

Would this be as a single transaction with one lender I assume?

Would there be penalties for doing this in terms of not getting the lowest interest rates available do you think?

How much do you think I should have to use of our savings for fees and stamp duty?

Thanks again.

[PompeyReece]

Another thing to note is that if you already own a property, you have to pay an additional 3% stamp duty on the 2nd (and subsequent) purchase.

[JulianPH]

lastexile69 said:

Ah, OK.

So we could borrow £63750 against my existing flat (and keep it to rent out) and additionally borrow £106250 against the new property?

Would this be as a single transaction with one lender I assume?

Would there be penalties for doing this in terms of not getting the lowest interest rates available do you think?

How much do you think I should have to use of our savings for fees and stamp duty?

Thanks again.

Sarnie is the king of mortgages here, so I will bow to him, but you will have extra stamp duty to pay (the total will be £5,950). If you sold your current flat to buy the new one the stamp duty would only be £880.

So you would need to make up £5,070 in rental profit to bridge this,

At £450 a month rental this would take you nearly a year (assuming no management fees, voids, or maintenance costs). This is probably worth it.

Though if you are paying management fees, have rental voids, or something needs replacing, then this time frame goes out of the window.

So what starts out looking like an attractive 6.35% rental yield has other considerations to be taken into account.

Another thing to remember is that you currently have no mortgage payments. If you did this you would now have £3,380 of interest on top of the capital repayments.

Let's say that management, maintenance and voids cost you 25% of the potential rental income each year. Forgetting someone trashing it and you are still left in the red when you factor in your new mortgage repayments.

None of the above makes this a bad idea, just not as good an idea as you may have originally thought.

The actual yield could be less than 1% (0.78%, to be more precise).

Of course you will have the potential for any capital gains, but they will taxable (as will your rental income be - sorry, I didn't factor this in).

Still, I can see why this appeals to you, but it will take you a year to break even and then it will be a small profit with a big tax bill.

Ask Groat though, he has forgotten more about BTL than I ever learned!

[CalNaughtonJnr]

Sarnie said:

Yes, it's called a Let-To-Buy mortgage.................you can lend up to 75% of your flats value to fund the deposit for the onward purchase and mortgage the rest.

My (now) wife did this with her flat when we bought our first house together, however she was told let-to-buy mortgages are interest only - is this correct?

[JulianPH]

CalNaughtonJnr said:

My (now) wife did this with her flat when we bought our first house together, however she was told let-to-buy mortgages are interest only - is this correct?

No. Sorry!

[CalNaughtonJnr]

JulianPH said:

CalNaughtonJnr said:

My (now) wife did this with her flat when we bought our first house together, however she was told let-to-buy mortgages are interest only - is this correct?

No. Sorry!

GGrrrrrrr - About half way through a 5yr deal!! On £165k she would have paid a decent chunk off

[CharlesElliott]

A lot of buy to let mortages ARE interest only, but they don't have to be.

Also bear in mind that you may well have to pay tax on your let income - and the amount you can offset is now pretty small.

[Sarnie]

Pothole said:

Do you mean borrow?

He knew what I meant

[Sarnie]

lastexile69 said:

Ah, OK.

So we could borrow £63750 against my existing flat (and keep it to rent out) and additionally borrow £106250 against the new property?

Would this be as a single transaction with one lender I assume?

Would there be penalties for doing this in terms of not getting the lowest interest rates available do you think?

How much do you think I should have to use of our savings for fees and stamp duty?

Thanks again.

Yes you could.

No, doesn't have to be with the same lender, in fact it's preferable for it to not be.

No penalties for doing this, no.

I can't answer the question about how much of your savings you'd need to use without knowing the circumstances as a whole.......but as others have said, you will pay the additional rate Stamp Duty.

[Sarnie]

CalNaughtonJnr said:

My (now) wife did this with her flat when we bought our first house together, however she was told let-to-buy mortgages are interest only - is this correct?

Not correct, you can have it any way you like, although probably over 95% of the BTL's we do are on Interest Only out of choice......your wife should be able to overpay the mortgage to bring the balance down........

[superlightr]

JulianPH said:

lastexile69 said:

Ah, OK.

So we could borrow £63750 against my existing flat (and keep it to rent out) and additionally borrow £106250 against the new property?

Would this be as a single transaction with one lender I assume?

Would there be penalties for doing this in terms of not getting the lowest interest rates available do you think?

How much do you think I should have to use of our savings for fees and stamp duty?

Thanks again.

Sarnie is the king of mortgages here, so I will bow to him, but you will have extra stamp duty to pay (the total will be £5,950). If you sold your current flat to buy the new one the stamp duty would only be £880.

So you would need to make up £5,070 in rental profit to bridge this,

At £450 a month rental this would take you nearly a year (assuming no management fees, voids, or maintenance costs). This is probably worth it.

Though if you are paying management fees, have rental voids, or something needs replacing, then this time frame goes out of the window.

So what starts out looking like an attractive 6.35% rental yield has other considerations to be taken into account.

Another thing to remember is that you currently have no mortgage payments. If you did this you would now have £3,380 of interest on top of the capital repayments.

Let's say that management, maintenance and voids cost you 25% of the potential rental income each year. Forgetting someone trashing it and you are still left in the red when you factor in your new mortgage repayments.

None of the above makes this a bad idea, just not as good an idea as you may have originally thought.

The actual yield could be less than 1% (0.78%, to be more precise).

Of course you will have the potential for any capital gains, but they will taxable (as will your rental income be - sorry, I didn't factor this in).

Still, I can see why this appeals to you, but it will take you a year to break even and then it will be a small profit with a big tax bill.

Ask Groat though, he has forgotten more about BTL than I ever learned!

Not to contradict Julian but to add

With the above I would highlight that yes the figures/amounts sound correct but the interest and capital payments is now on the two properties you own not just one. Even if you sold flat 1 to buy flat 2 you are going to have mortgage payments. The cost would be the difference in the cash sale of the property 1 -v- the shortfall in the value of the BTL mortgage on property 1. (apologies if Julian has worked this out and was referring to this but it looked like a straight cost of the mortgage) yes you have the extra stamp duty/LRT for the 2nd property.

With the rental itself - I would work on the property being let 10/12 mths a year. We can often get this much higher and the aim is to have a single tenant for many years. So could well be 12/12 for a few years and then 11/12 or 10/12
Yes you can have bad tenants but if the letting agents do a good job then this is vastly mitigated. Yes you will have management charges generally about 10-15% and normal maintenance.

What a lot of our landlords see is the rental income giving a modest income but with the gain of the capital increase. If you can keep the property until the mortgage is paid off from the rent income and have a modest income then you have a good asset with a steady income. Again if you have bought in a good location the ability of the letting agent to let it will be vastly increased and the capital will likely increase.

We as agents look after about 350ish properties.

Edited by superlightr on Friday 12th June 18:57

[JulianPH]

superlightr said:

Not to contradict Julian but to add

With the above I would highlight that yes the figures/amounts sound correct but the interest and capital payments is now on the two properties you own not just one. Even if you sold flat 1 to buy flat 2 you are going to have mortgage payments. The cost would be the difference in the cash sale of the property 1 -v- the shortfall in the value of the BTL mortgage on property 1. (apologies if Julian has worked this out and was referring to this but it looked like a straight cost of the mortgage) yes you have the extra stamp duty/LRT for the 2nd property.

With the rental itself - I would work on the property being let 10/12 mths a year. We can often get this much higher and the aim is to have a single tenant for many years. So could well be 12/12 for a few years and then 11/12 or 10/12
Yes you can have bad tenants but if the letting agents do a good job then this is vastly mitigated. Yes you will have management charges generally about 10-15% and normal maintenance.

What a lot of our landlords see is the rental income giving a modest income but with the gain of the capital increase. If you can keep the property until the mortgage is paid off from the rent income and have a modest income then you have a good asset with a steady income. Again if you have bought in a good location the ability of the letting agent to let it will be vastly increased and the capital will likely increase.

We as agents look after about 350ish properties.

Edited by superlightr on Friday 12th June 18:57

Quite correct.

I have had a quite busy day (and still am), but I think I factored in the new mortgage numbers (interest only).

If it would keep itself clean and allow me to make the capital gain then I would do this, but controlling the capital gain (for tax purposes) is something to take into consideration. It can be done, but there will be stamp duty on the transfers required. Then there is income tax to account for,

BTL is not what it used to be.

[cml24]

What about income tax on the rental income? That hasn't been mentioned yet has it?

I let out my house and rent another, but in the process 40% of the rental income disappears so it's not a situation I want to continue with now I'm back in the UK.

[jayxx83]

First thing i would say is avoid new build with a barge pole if you can. Generally overpriced cardboard boxes imo. A guarantee for negative equity in the short term. Plus if you need to exit quick you are selling something that probably identical to the next one below / above.

Let to buy is a great idea. If you are worried about voids you can get rent guarantee insurance for your tenant. Usually about £99 for a year. It’s a people’s business so by being on good terms usually does wonders.

If you are looking at a modestly priced 2 bed then certainly for the long run worth keeping the old one.

5 year fixes are just over 2 pc but for such a small loan look for one with a lower / no arrangement fee rather than chasing the rate.

On 5 year deals lenders some lenders will assess the loan amount requested at an assumed 4.50 pc interest rate some 5pc. Then dependant on what tax band you are in load by 1.25 or 1.45 time.

So for a loan of £63,750 rent will need to be min £300 a month to around £385 a month max. If you take a 2 year deal the stress rate is 5.5pc.

BM solutions or virgin are quite competitive at present.

Edited by jayxx83 on Friday 12th June 22:42

Edited by jayxx83 on Friday 12th June 22:43