Can I use equity in my other property as a depoit for a new one?

Posted on 2 May 2008

Hi Katie,

Firstly I’d like to congratulate you on offering such great advice to people, I must confess your blog has become something of a regular read for me, have learned a lot from all the questions. So I’m hoping you can do the same for me.

I am looking to buy a property to live in and have a £10K cash deposit with an annual salary of £37K. I also own a buy-to-let property worth £180K with an outstanding repayment mortgage of £55K, and the rent I get covers mortgage repayments by 160% (well above the 125% recommendation).  

How much equity can I get out of the BTL to use as a deposit towards the new house? Also what is the maximum loan amount I can get from a lender after paying the total deposit? 4x salary?  Alternatively is it wiser to try and pay off as much of the capital on the BTL property and reduce the mortgage payments before looking to buy a new property?   Thanks in advance for your advice.

Thanks Harish, it's always nice to hear that someone is reading it all!

Whilst some buy to let lenders are lending 85% of the property value still, many have reduced their maximum lending to 75%.  To calculate how much you can borrow, work out what the new monthly payments would be, (roughly) on an interest-only basis, and then calculate 125% of that. 

For your residential mortgage, many lenders will still be able to lend 4x income, as long as your credit score is good enough and you have a deposit. This would mean around £148,000 mortgage. Assuming you could increase your BTL mortgage by about £50,000, and you also have £10,000 cash, you would be safe to look at properties in the region of £200,000, whilst still having some left for costs.

I am not a tax advisor so you would be wisest to get this confirmed by one, but my understanding is that it is best to keep the debt as high as possible on a buy-to-let property, because you get tax relief on the monthly interest payment, so the higher the better.  This is also the reason that most people arrange their BTL mortgage on an interest-only basis, they don't want to reduce the debt, and instead plough their income and excess rent into paying off their residential mortgage.

Your next step is to get a quote for the BTL remortgage, because what you can raise on this is pivotal to your plan.  A broker would need to know your rental income to calculate the loan amount.  Our number is above if you want advice from a Whole of Market, Fees Free broker.  

Best of luck

Katie.

 

 

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