Q We have a house and, as a result of low interest rates, we have been overpaying our mortgage. We are required to pay £350 a month but we currently pay £1,000 and we reckon that we have approximately a year to go before the house is paid for. It is worth about £250,000 so in a year's time we will have £250,000 in equity.
My idea is to rent out this property (a neighbour is letting theirs for £1,100 a month) and buy another to live in. It might be a non-starter but I'd be interested to see if you think it could work. The problem is that we would not sell the house in the normal way to put towards the second property. So I am wondering if it is possible to use the value of the property as a deposit without actually selling it.
We are able to afford £1,000 a month and would make around another £1,000 in rent, so we could easily afford another property.
Eventually we could either sell the first property and pay off a big chunk of the new mortgage or carry on taking rent and using it as a pension. DN
A You can use the value of your current property to get cash for a deposit by taking out a let-to-buy mortgage on it. Let-to-buy mortgages are very similar to buy-to-let mortgages in that the most you can typically borrow is 75% of the value of the property you intend to let and the rental income you earn from it must cover the mortgage repayments by at least 125%.
Let-to-buy mortgages differ because they are aimed at people wanting to switch a home they've lived in to a let property while buying another place to live with a separate residential mortgage (if necessary) secured on that home.
In your case, if you
were to take out a let-to-buy mortgage of 75% of the value of your current property, you would raise £187,500 in cash to put towards your new home together with however much you could borrow with a mortgage for the new property. Assuming an average let-to-buy (and also buy-to-let) mortgage rate of 4% and an interest-only mortgage, your monthly repayments would be £625. To cover that by 125% your monthly rental income would need to be £781.25 so if you really can get a monthly rent of £1,000, you'll have ample rental income to cover your mortgage commitment. That would not be the case if you took out a 25-year repayment mortgage where the monthly mortgage repayment at 4% interest would be £988.12.
If you had an outstanding mortgage on the property you wanted to let, the figures would not have worked out quite so well. Another reader with a mortgage of £70,000 on a house worth £130,000 got in touch saying he wants to let his current home and buy a bungalow for £136,000. If he switched his current mortgage to a let-to-buy loan and increased it to 75% of the value of the property, he would raise £27,500 in cash to put towards the bungalow. This would mean he would need a new residential mortgage of at least £108,500 to make buying it a possibility. And again assuming an interest-only let-to-buy mortgage with a rate of 4%, he would have to charge just over £400 in rent to cover his mortgage payments by 125%.
The number of companies willing to lend on a let-to-buy basis is limited and several will not deal direct with potential borrowers. So to get the best deal it's worth getting a mortgage broker who looks at the whole of the market.
Muddled about mortgages? Concerned about conveyancing? Email your homebuying and borrowing worries to Virginia Wallis at firstname.lastname@example.org