Equity release / "let to buy"

[EssentialHummus]

Posting here to get a sense of perspective from others.

DP and I are looking for a family home. It's not at all urgent.

We're in SE London, and had settled on a budget of £450k or so - you can buy a great 3 bed flat / ok terrace here for that amount, and we're happy to do work over time. We have/will have a £45k deposit.

DP works and can afford to borrow that amount (£450k) on his own. I was a solicitor but stepped off a few months ago to start my own business. No SA302s / accounts yet but likely earning £25,000 all in (inc. BTL income - below).

We've now found the flat of our dreams - for £600,000. It's on the same street we currently live on, so we feel we know the area very well and would be happy there. We're both different in what we want so frankly finding something that we're both jumping up and down about is near-miraculous.

This is waaaaaaaay more than either of us wanted to spend, though.

I own (w/mortgage) our current home, and there's a lot of equity in it - around £140k. I'd keep and rent this out. There's another BTL in my name with a little bit of equity in it - around £10k. DP owns his own home, which is rented out, and that has another £100k or so equity in.

Mortgage broker, during initial conversation, suggested raiding all the equity and using that to increase deposit. I feel uncomfortable doing so, though am yet to work out what the increased monthly mortgage payments would be if did this.

Given that we're only planning to do this once I could also suck it up and go back to "proper" work to pay down our debts/increase our budget for a while. I was a high earner and could get a good salary, I think. Don't want to but would grit my teeth.

I am happy to move out further to get more for our cash, DP isn't.

Are we stretching ourselves too far here?

What questions should we be asking ourselves about whether this approach is right for us?

[wowfudge]

I think you should ask yourselves how you would cover all the mortgage payments if a tenant defaulted or you had a void. It's not clear whether your DP's property is mortgaged from your OP. What about unexpected repairs - do you have a fund for those? You could end up seriously overstretched and should bear in mind that interest rates are probably only going to go up, although possibly only towards the end of 2017 I heard yesterday.

[EssentialHummus]

Thanks fudge.

DP's property is mortgaged. We're both conservative with money so would never go "all out" - we'd want some leeway.

Re repairs - I have a repair fund for current BTL and seem (touch wood) to have a measure of what will need doing when. I know unexpected repairs are unexpected by nature, but both DP's house and our current home are in very good nick, with all external repairs handled by local council. Current home's boiler is ancient but we've budgeted for it conking out soon.

Given where the flats are, we've had very low voids to date - as in, less than a week a time. (Could've been shorter, but we were reluctant to inconvenience tenants with viewings.)

The other option is to sell one of the houses, I guess - but then we're a) in a chain and b) losing capital growth and rental income.

[lalalonglegs]

I don't think that the equity that you have in your properties is that high in relation to the money you need. BTL mortgages are generally to a maximum of 85% but most will only go to 65-70% LTV so that is going to chip away a lot at your £140k and mean the £10k equity is untouchable. If your husband's house is already let, he would have to check the mortgage terms to see what the penalties would be for remortgaging, as would you on your residential mortgage, and you will also find that BTL mortgages come with much higher arrangement fees (and generally higher interest rates) so you will have to allow for those also. It sounds quite tight, imo, especially as some of the allowances and tax advantages of BTL are being abolished or whittled down and, as your husband is higher tax payer, he will be caught in this (as you might as well when your rental income takes you over the next threshold).

[EssentialHummus]

Thanks lala, that's helpful.

DP's flat was consent to let-ted, fixed term has come to an end so he's now looking at BTL mortgages.

That "£10k" equity is actually "£10k between current mortgage and figure that would take us to 70% LTV" - sorry, I wrote that completely incorrectly. But it's a v little amount of money in the grand scheme, so that BTL is likely to stay as is. The others are accurate - have estimated values conservatively.

If we get BTLs we will stick with repayment rather than interest-only, as we'd like to end up owning outright in the long term.

[MsRinky]

If your husband can afford to borrow £450k on his own, I assume he will be getting 45% or 40% interest relief on his current BTL mortgage. If you're also getting rent income from your current BTL, and are planning to also let out your current place, you are also likely to be into higher-rate tax.

The current BTL interest reliefs will be reduced to 20% over the next couple of years - there is a calculator here: www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11966662/Buy-to-let-calculator-how-will-new-tax-reduce-your-profit.html

[EssentialHummus]

I was looking for that calculator - thank you rinky!

I think I will just about be a lower-rate tax payer all-in, but this needs revisiting/checking.