Buy to let?

[CharlieB93]

So I live in a house which has a mortgage on, I’m looking to move to a bigger house and I’m considering keeping my current house to rent out.
Could anyone explain to me how it work in term of a buy to let mortgage? And getting another mortgage to live in? Can you have two mortgages in this way? How is it calculated in terms of how much you can borrow?

You can have two mortgages, yes, providing one is a normal residential mortgage (for the house you live in) and the other is a specific buy to let product (for the house you rent out). They can be with different providers etc and sometimes a bank will permit you to convert an existing residential product into a BTL if you have early repayment fees etc to consider. Residential mortgage affordability is worked out in the normal way based on your income/outgoings (normally around 4-5 x your annual salary), BTL affordability is based on a ratio of the rental yield (usually the rental income needs to be 125-150% of the mortage payments).

You will need to ensure you leave at least 25% equity in the rented out property as the loan to value rate on the majority of BTL products will be no higher than 75%. And of course you will need to make sure this leaves you enough capital to purchase your next house plus fees etc. E.g. if your current house is worth £150k, you have £100k equity, and you want to buy next place worth £250k, you could split the equity in half and get an 80%/£200k residential mortgage (if that's affordable on your salary), leaving £50k in current property and get a £100k/66% BTL mortgage (assuming that makes sense with the rental yield). But obviously if you have much less equity or are a lower earning making getting a sufficient residential mortgage difficult, it starts to be trickier. So you need to get going doing your sums, I'm sure people here will help you do rough sums if you can post: value of your current property and amount left on the mortgage, value of your new residential property, your approximate annual salary (and that of anyone else buying into the new house), expected monthly rental income for current property and any other savings/capital you want to invest into this project...

Also, bigger question really, why do you want to keep and rent out your current property? Are you experienced/knowledgeable about property management, have you done your sums with the true costs and worked out your profit margin, including all the things people forget like mortgage interest payments (the less capital you have the more these are), tax, agents fees, maintenance, void periods, tenants stopping paying rent and needing to be evicted, the list goes on... A lot of times these days for small-scale/one or 2 property landlords their BTLs end up costing them money in the short term so you need to be really sure it's the best use of your capital compared to other more passive/less stressful forms of investment.

If the reason for wanting to keep the property is to do with ring-fencing your money from an unmarried partner you're looking to purchase/move in with, there are other ways of doing this to make sure your money is secure, or if it's because you are relocating and want to keep a foothold in the local market likewise. Or if it's just purely as an investment, unless you have particular skills/interest in property management or think you've really hit on an opportunity for unusual growth it's likely there are better, easier, safer places to invest your money...

I agree with @maxelly remember all income in taxed at your marginal rate. there are a lot of new regulations involved in BTL now, and BTL is becoming politically unpopular and a source for future taxation. for me there are better places for tax benefits and having a diversified investment portfolio that having a large amount in residential property at the moment.

@maxelly wow thank you that was really helpful!! It’s more to do with keeping it as a potential pension fund to be honest, I’m nearing 30 and I have only just got my act together with sorting anything pension wise out (apart from work place pension). Also without romanticising it - I’d quite like to come back here when I retire!

So I was planning on remortgaging current property as a BTL with the minimum 25% equity, taking the rest of my capital out and using that as a deposit on a new house (probably working out about 15% deposit?) my worry was that I wouldn’t be able to get a mortgage for the total value of the BTL and residential combined.

Out of curiosity- where would you invest if you had a lump sum? Would you just feed it into your mortgage?

Ah I see, well what I would do may not be relevant as it depends on so many personal factors but BTL wouldn't be my first choice and I'm not sure it sounds great for you either - the wanting to retire in the area thing is not especially relevant in my eyes as (sorry!) it's the best part of 30 or more years away for you, unless you have reason for thinking property prices in that area will shoot up much higher than the rest of the country, pricing you out of the market, which would be unusual - so long as you invest your money sensibly retiring back there should be achievable. Of course if you want to retire to that specific house ie you are emotionally attached to the property that's different but I still not sure renting it out is the answer, tenants are no great respecters of sentimentality unfortunately and I'm sure you wouldn't want to see the place trashed or run down.

The other factor is that while it's great to be planning for retirement early (I don't know many 30 year olds that have pension funds outside their workplace pension ) at your age it's reasonable to think you might want access to your capital at some stage in the next 30 years, whether to fund a house-move, help out any subsequent DC with their education or deposits, or god forbid, a rainy day in terms of job loss or significant illness. A BTL is one of the most illiquid assets out there, if you have sitting tenants it can take the better part of a year to evict them, sell up and get your cash...

What would I do, I might put some into the mortgage if it meant I got a significantly better interest rate, an 85% LTV won't be the cheapest out there and if you went down to 75% or lower you might get a better deal - do the maths there using comparison sites or quotes from a broker or whatever. Otherwise in order of priority I would:

1. Pay off any high interest debts, credit cards and overdrafts, car finance, store loans etc (you don't mention any debt but it's surprising how many people push themselves to invest elsewhere while still paying £££ on this kind of credit. If you plan major expenditure on new car, home improvements or holidays put that money aside - of course the best thing financially is to avoid spending too much on these at all but if the alternative is expensive credit then of course it's better to use your capital/savings instead).
2. Ensure you are on best value mortgage rate for your circumstances.
3. Max out ISA allowances (not necessarily cash ISAs as these have poor interest rates although I keep some in a cash ISA as an instant access rainy day fund). Consider also if you have any DC using their junior ISA allowances, if you want to save towards their future also. Feed extra into these every year to ensure you use up your allowance.
4. Ensure you are using your max pension allowance including the max employer top-up/government contribution. Potentially look at additional voluntary contributions through your workplace pension or a private pension option.
5. Invest rest in a managed fund of some kind (easiest if you aren't knowledgeable) or bonds depending on risk appetite, something like a combination of government bonds, exchange traded funds, tracker funds or similar (depending on risk appetite etc)...

@maxelly great advice again! Is this what you do for a living?
Yes like you say, I’m probably looking through rose tinted glasses. I’m a worrier (and a planner) hence fretting about pensions etc. I may look at mortgages and see what difference higher LTV will make in terms of interest rates ands go from there. I may be slightly naive to think that tentants may wreck my house (didn’t even cross my mind)
I have no debt (bar mortgages) I’ll have a look into the managed funds also. I’ve also opened a LISA to put spare change into so I’m hoping that will contribute to my pension pot!
Thanks so much for your help!

No absolutely not what I do for a living, just a (pretty geeky!) hobby really .

I'm not saying that all tenants trash houses (before I get leapt on), of course not, the majority are very sensible and responsible. It's only a small minority that will actively cause damage. It's just that no tenant (or no sensible tenant anyway) will look after the house like it's their own, because, at the end of the day, it isn't. So while they will hopefully keep the place clean and tidy, no egregious smashing up of the walls etc., they're not going to be spending their weekends and spare cash as an owner would, doing little maintenance and garden jobs, decorating, touching things up, DIY etc., so even if you get lucky with long term careful tenants, over the years the place probably will go downhill especially if it's a family sized house/ your tenants have young children - obviously as a good landlord you would maintain the place but unless you spend ££££ over the years (which eats into your profit and is annoying to arrange with tenants in situ) it won't ever look as nice or be the same as when you lived there yourself. Being a landlord is just a whole heap of hassle at the best of times really and IMO not worth it unless you want to become a proper professional landlord with a large portfolio of carefully selected properties at which point economies of scale can creep in to make it more profitable.... I honestly think for you it would be more of a burden, you're better off emotionally (never mind financially) letting the house go and investing your energy into the new place?

Buy to let is immoral in most cases in my opinion.

It took me many, many years to be able to afford a mortgage because so many people were buying to let.

Unless there's a real honest renters market for people who actively don't want to buy in your area then you are pricing people out of home ownership just to line your pockets.

Still, nothing illegal about it I suppose so if you can sleep at night go ahead!

@Yesyoucantell wow!! Sorry I didn’t mean to offend it was just a genuine question. A lot of my friends choose to rent in this area as they don’t want to deal with upkeep of properties/being tied down to one place!