Posted on 10 October 2010 by CaCa
I have a house with Â£48k mortgage. We are about to sell the house which we bought for circa£200k and now worth £300k+. We intend to buy a property worth somewhere in the region of £400k. We also need to know if we should keep the existing property and rent it out, thus affording us the luxury of releasing equity for a large deposit on our new home? The rental income should be able to fund the new mortgage? At least this would be the plan (ceteris paribus).
Could you please advise or offer alternative methods to achieve this?
This is all going to hinge on the anticipated monthly rental income you could expect to receive. Once you know this figure a good independent mortgage broker will be able to crunch the figures for you and determine how much you could release from your existing property.
There are a few matters that you should be made aware of that will impinge on the feasibility of your proposal:
There are very few Buy to Let mortgages available at high loan to values (LTV) and you will probably be restricted to borrowing around 75% of the property value. This would give you a mortgage of around £225,000 and monthly payments of between £1100 and £1500, depending on rate and repayment type. Of this loan amount roughly £50,0000 would be needed to redeem your existing mortgage leaving you with £175,000 to put down as deposit on the new property.
When looking at affordability of Buy to Let mortgages Lenders want your monthly rental to cover the interest only payment plus a margin of up to 30%. i.e. a monthly mortgage payment of £1000 would need a rental income of £1300 to be acceptable. The exact margin differs from Lender to Lender and product to product. The reason for they ask for this margin is to make sure that you have sufficient funds to cover routine maintenance, unexpected outgoings and rental voids. I would not expect you to have much left each month to help you with the costs of a new residential mortgage.
You will also need to take advice on the best method of repaying any BTL mortgage. Whether you choose a capital and interest mortgage or interest only mortgage. Whether you choose a fixed rate or variable rate. The term you choose to repay the mortgage over. All these things will have an effect on you monthly repayments and how protected you are against future interest rate rises and I strongly recommend you seek the independent mortgage advice I mentioned earlier.
Answers provided in response to Ask the experts are based on the information provided and do not constitute advice under the Financial Services & Markets Act. They reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.
We recommend you seek professional advice with regard to any of these topics where appropriate.