Using Equity to Buy Property

[FinallyAMum]

DH and I are in a very fortunate position to own 3 properties valued at about £700k combined, two which are rented out and one which we live in.

We want to rent out our current home and buy another house, I’ve seen a house that I love that costs as much as all the equity we have in our houses combined, so £700k.

Is there a way we can buy this house without selling the rental houses and our current home? I’ve spoken to a couple of banks who say it’s not possible but surely actually rich people do things like this all the time?

We have pretty normal salaries, we’ve just had a combination of luck, hard work and inheritance that mean we are in this fortunate position. We grew up very working class and don’t know anyone in a similar position we can ask for advice. We are going to speak to a financial advisor properly but in the meantime, does anyone know how or even if we could do this?

You can do it by selling all three properties and releasing the equity.

Do you have mortgages on any of the properties or do you own them outright?

Equity isn’t real money, you can’t have equity as cash the house. You either sell some or all the properties, take a mortgage against one of them or take a mortgage against the new one.

The issue is no one is going to lend you 100% on 3 properties which are let out. You might have enough equity but it's too high risk for the banks to lend on.

They’re all owned outright. I know we could sell them but we wouldn’t do that. I would mortgage them though if that was a possibility, and DH and I could get a normal mortgage (in theory) for around £250k

How do you intend to service the mortgage if you could only get one of 250k on your income ?

Edit for spelling

You can mortgage all three current properties and then take a residential mortgage on the new property. Different lenders will have different appetites for risk as to how much they’ll lend, at what rate, what level of rental income is expected relative to mortgage costs etc. And then a residential mortgage will take into account your income (from property as well as employment if any). You probably know this, but I think in the circumstances you will also pay SDLT at the higher rate, so that needs to be factored in.

Even if you could you’d be in a very vulnerable position. You’d have £700k of debt and only be able to afford a £250k mortgage so would be relying on the rental income for the rest. I suspect it wouldn’t even make it into lending rules for the btl mortgages
You could perhaps sell your current property, remortgage the btw for a lower amount on a btl mortgage, and take out a further £250k mortgage. I am not sure that would give you enough though - it’s hard to know without different values for different properties

I’ve spoken to a couple of banks who say it’s not possible but surely actually rich people do things like this all the time?

That's because they are rich..

banks are a lot more cautious these days.

Most want a 25% deposit for a BTL now, 100% is crazy

You could in theory remortgage all 3 properties onto BTL mortgages and take out 75% from each then get a mortgage to fund the rest
But currently you own 3 properties all mortgage free, have rental income from 2 of them and enough income to borrow up to £250k.....you must be quite comfortable with savings?
Not sure I'd give up that position to be mortgaged up to £700k....

Wouldn't CGT potentially be an issue if you inherited some of the property?

Also wouldn't you have Stamp duty on the new house of like 50k?

If it's your dream house, sell a property or 2 and take out a mortgage.

I don’t understand your comment about the rich doing it? The rich would just have £700k cash sat in the bank and not need a mortgage.

As others have said you may be able to get buy to let mortgages on your rentals to release capital and use that as a deposit on your residential property. And take out a small residential mortgage. You’d be very heavily leveraged though.

Personally I’d sell all the rentals to fund your home.

OP, it should be possible in theory but all depends on your individual circumstances. Best wait until you soeak to your financial advisor and also ask a mortgage broker who specialises in buy to let properties. You may also want to consider buying the new home under a limited company.

I don’t understand your comment about the rich doing it? The rich would just have £700k cash sat in the bank and not need a mortgage.

No rich person will leave 700k sitting in a bank account!!
They also sometimes take out mortgages if it's beneficial to put their money into something else.
But the ones who stay rich don't tend to leverage themselves to the hilt.

Talk to a specialist mortgage broker

Yes I know that I was just using it as an expression to mean they’d likely be a cash buyer…

You will need a substantial deposit on the new property. I wouldn't leverage the existing properties beyond 50% as the rates for commercial mortgages (which is all you would be offered) would be much higher.

In short, the numbers don't add up. If you could only borrow £250,000 on a residential mortgage of the new property that leaves you looking for almost £500,000, if you include legal fees and stampt duty. Buy to let mortgages of £500,000 on a portfolio of £700,000 is over 70% so would put you in a very vulnerable position if you ended up with any issues on the rentals, e.g. non-payment or vacant periods. You won't have a sufficient level of other income to support that.

Ad for the rich doing it, they have the alternative sources of income and capital to support it. Years ago I was involved in a lot of commercial property business - we only lent, if the borrower has sufficient capital invested elsewhere to cover the borrowing. Too many people get burnt by over-borrowing.

Your title is about using the equity you have to buy a new house but you don’t seem to want to use it - using it would mean selling the houses you have to use the equity to buy the new house you want.

Will the banks recognise the rent you receive from the properties as income and combine that with your salary for the purpose of calculating borrowing capacity? That’s the max. you could borrow to fund a new property without selling them.

This might be possible, but - as others have pointed out - it leaves you highly leveraged and vulnerable to periods without tenants. Or bad tenants. You won’t have much wiggle room and that doesn’t make for a comfortable life. Plus, the stamp duty would be somewhere in the region of £60K as it would be an additional property, so that puts the price up a fair bit. Have you ever been landlords before? It’s nowhere near the money-maker a lot of people assume it is. Taxation rules have changed, there is more legislation possibly coming in which will make it harder, and even if you have an agent managing the properties (and they will take a good percentage of the rent to do that) it will be a headache. Remember you will have multiple maintenance and repair bills to take into account as well - would you have the bottomless pit of funds for that too...?

If you are really set on this £700K house, then you’d be better selling as many of your properties as you need to and getting a mortgage if you need or want to, rather than getting yourself tied up in knots and overextending. Often the straightforward solution is the best one.

You need to go and see a mortgage broker, one who does BTLs as a day job. You probably can take out a mortgage on your three existing properties but the LTV% you’ll receive will depend on the rental value and related stress test. The absolute maximum you’ll be able to take out will be 70-75% and with your new property being subject to the additional property tax, it’s highly unlikely you’ll be able to extract £500k+ I’d also think long and hard if you can afford it. If you’re only eligible for a £250k residential mortgage it sounds like you’d be leaving yourselves exposed if significant maintenance work arose.