What is the best mortgage?

Posted on 29 August 2012 by Ketan


I currently live a property which is cleared of mortgage.  I want to rent this property out and then purchase another one as my home.  What is best approach/mortgage to follow?

Ketan

You have two choices available to you 1) raise a Buy to Let mortgage on your existing property or 2) raise a residential mortgage on the new property.  Each has it's own pro's and con's and depending on whether you have a deposit saved you may end up with a combination of the two.

Buy to Let mortgages tend to have higher interest rates and higher arrangement fees to reflect the higher risk to the lender of a property that is not being lived in by it's owner.  Depending on your own personal tax position it may be possible to set off the interest payable against the rent you receive and reduce your tax liability.  You would need to take specialist tax advice about this before allowing it to influence your decision.  They are also assessed against the anticipated rental income, typically the monthly rent will have to cover 125% of the monthly interest payment and the rent you are able to command will be influence by the property type and location.  You should obtain rental assessments from at least 3 local letting agents.

Residential mortgages tend to be cheaper and there is a wider choice of lenders.  The greater the deposit you are able to put down the lower the interest rate will be.  The actual amount you can borrow will be limited by the property value and your earned income, lenders have to make sure the monthly payments are affordable.

Without conducting a full review of your income, expenditure, your current employment and attitude towards risk it is not possible to advise you which is the best way forward and as i said earlier I suspect you will end up with a combination of the two.

We can help you decide how to proceed and you would benefit from speaking to one of our independent mortgage advisers.  Please call 0344 346 3672 and tell the consultant the date and title of your question, they will then be able to help you find the right solution for your situation.

Peter

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.

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