Mortgage and second homes

[bombastix]

I'm thinking about buying a second property and renting out my current home. The house has a small mortgage and the equity is about £400k. I should be able to get a rental mortgage to cover it.

However I would like to buy a new property and have no other assets (some savings and a reasonable salary of 95k) but it's been suggested to me that I can use the equity in the first house to buy the second to fund the deposit.

Has anyone actually done this? I am a pretty risk adverse person as single parent - there must be an obvious downside?

Yes, I did it. I took the deposit out of my first home by remortgaging. I had about the same amount of equity as you. I transferred to a Buy To Let mortgage.

I then got another mortgage on the house I now live in. I had to move 200 miles for work reasons but wanted to keep my original house in case it didn't work out so this seemed to be the best way.

The downside for me has been the huge rise in mortgage rates since my fixed rate ran out!

Yes. And yes there are. I did exactly this and in fact was able to afford a better house this way than if I had sold my original one by some quirk of the rules at that time.

Things to keep in mind are:-

1. You will either need permission from your existing lender to rent out the property, or will need to switch to a buy to let mortgage. The latter often have higher mortgage rates, more stringent lending criteria and rules about loan to value ratios.
2. The tax position has changed, so you need to pay tax on the entire rental sum (less some allowances). You can no longer claim tax relief on the interest payable on the mortgage of the rented property.
3. Renting is not for the feint hearted. The law now falls heavily on the side of the tenant, which, for reasonable tenants and shit landlords is fine, however if you are a decent landlord and get a shit tenant, you can have a world of trouble. You should budget to have at least a year of mortgage payments in hand. If your tenant stops paying, it can take a long time to get them out. Lengthy court processes, expense etc.
4. Since this was your primary residence, now is a good time to think about transferring the asset to a property company owned by you which is tax efficient in the future. See an accountant for this, it may not be as efficient these days.
5. Make sure you find a good letting agent and let then fully manage the property for you. Factor this into your expenses, as it will cost, but it will be worth it in the long run as you never have to deal with the tenants directly.
6. See if your local authority will rent it from you. They often do, and guarantee the rent, tenants, repairs etc. This is at the price of a lower rental income for you though.
7. In addition to point 3, keep money aside for repairs, renovations, etc. Tenants seem to wear things out way more quickly than I can portray here.
8. Buy the cheapest carpets and budget to replace them every couple of rentals. They make a real difference to how good the place looks and feels.
9. Double check everything anyone tells you, including my list above.

I have reached the end of my tether with mine and am selling up, mainly due to point 3.

Good luck.

Thank you, very useful answers! It sounds like it is worth exploring a little more at least.

However renting expenses is one thing i obviously haven't considered as well as paying tax.

The house is a great property but I want a new start somewhere else. I'm post 45 so understand at a certain point banks do not lend as generously after a certain age, at least for residential mortgages.

We did this in 2015 (bought second property to live in and rented out first house, and got two mortgages, one in each property). We sold the rental property a couple of years ago now, and I am so glad we did as it just does not make sense financially any more - especially if a higher rate taxpayer. Current mortgage rates mean that monthly interest payments are so high that they may not even be covered by the rental income. And then you will be paying 40 percent tax on the whole rental income, with just a small relief applied afterwards. The rental income will also no doubt take your income above £100k (your post mentioned you are on £95k?), which means that you will start to lose your personal allowance (I think the marginal tax rate is equivalent to 60 per cent or senthing like that, at £100 K. Also as you will be purchasing a second property you will have to pay an additional 3 per cent stamp duty (which could be an additional £10 k, £20k or whatever depending on cost of house). And you will make yourself liable for capital gains tax when you sell the first property, which again could cost you £££s. And if you don’t live anywhere near the rental property then you may need to use a managing agent, for tenant find and management it can be 15 + per cent.. Managing agents also sometimes have a clause that they do not need your permission to authorise maintenance of up to £250, so owners can find that they have lots of maintenance invoices at just under £250. Managing agents can also charge an admin fee for each maintenance occurrence. So it can all start to get very expensive. Openrent is the only cost effective way of finding a tenant, but that is not really possible if you are not living near by. So sorry to be the voice of doom - but I honestly don’t think buying a rental property with a mortgage is a viable option at the moment. If you look on Rightmove, lots of rental properties are for sale as it is not financially sustainable, and landlords can potentially end up subsidising a rental property by £100s of pounds a month - there is such a perfect storm at the moment, with interest rates, tax changes, interest relief changes etc etc. Sorry again to sound so gloomy about it - but anyone going into this would need to consider every single aspect of costs very carefully before making a decision to do it.

The main benefit these days is the increase in the value of the property over time. It is a long term thing now.

Also, whereas the old way used to be to have an interest only loan on the rental to get the tax benefit, it is probably worth having a standard repayment mortgage on the rental these days despite the cost being higher. All depends on your own economics.

As you are in the higher tax bracket you need to factor tax of 40% on the majority of the rental income (less the allowable offsets).

I would very much suggest transferring the asset to a limited company owned by you as there are benefits from an inheritance tax perspective when you want to leave it to your child / children. Get some professional advice about this, but make sure you ask questions about all scenarios, namely maximising income for you, and also being inheritance tax efficient. They are not necessarily one and the same.

It was very easy for me to get permission to rent from my mortgage provider and they transferred us to a Buy To Let easily too. With a lot of equity and a decent income there is no reason not to.

We use Open Rent to find tenants because I would prefer to meet them myself rather than an agent choosing who is going to live there. There are no guarantees though, people's circumstances can change. We do have non payment of rent insurance though.

This is all very useful but I think I am going to need to speak to my mortgage broker and an IFA; and think hard about the numbers. The reason to do this is that I wish to retire and retire to somewhere more expensive. On the current figures I have that will not happen if I just pay a single residential mortgage and then sell when I retire.

The house is a good property but would be hard to sell right now I think without more investment into it. I had planned to refurbish it totally but have not yet finished. Personally I am sick of the area and want a fresh start; yet objectively the house is a good long term asset. It's me and my capacity to stay in it that is doubtful. I wouldn't move very far, perhaps only a few miles away.

Food for thought. Thanks everyone

I have done this.
Let's say your current home is worth £500,000, and imagine you still owe £100,000 on the mortgage. So you decide to remortgage it at a 75% loan-to-value (LTV), you would borrow £375,000 and keep the remaining 25% as equity in the property.
Once you subtract the original mortgage of £100,000 from the remortgaged amount of £375,000, you're left with £275k of equity that you can use as a deposit for a new property.
When it comes to buy-to-let (BTL) mortgages, lenders are mainly concerned with the rental income covering the mortgage payments rather than your age. So, age isn't a significant factor for BTL lenders; they prioritise rental coverage.

Being a LL with a hefty loan can go belly up very quikcly if your first lot of T's were bad T's

Consider what would happen if your first lot of tenants stopped paying rent and and its taking a long long time to evict them because of backlogs

May seem expensive but using a LA at least 1st for full managment but check their costs carefully and pay for insure re rent cover and legal fees and ensue AST is good so find a good, well established LA

also consider what would happen if you become ill for more than a year - losing ones job is not a big deal as long as you have health

Always have a years amount of cash in the bank and dont nank on T's paying rent and the reapirs need to be considered

But, go for it and but a property in the bestest lcation you can afford to rent out and think about who your ideal T's are - don't accept pets/smokers