second mortgage - buy to let

[My2favboys]

we've out grown our property and due to circumstances are not able to sell. how difficult is it to get second mortgage if we're planning on letting original home. we have about 20% already saved

Pretty easy

Your BTL mortgage on your current property will be based on rental potential

Your mortgage on your new home will be based on salaries as usual

Do you have any equity in the current one?

We are doing this. We have around 80% equity in our current house. We have a separate deposit of 20% saved for the new house we are upsizing to. So we are porting the remainder of our current mortgage and turning this property into buy to let. No problems at all and bank applied usual affordability principles.

we have a little equity in current house and know we should be able to get it rented easy enough.
okay next step is speaking to the bank

Remember that your new BTL in your current house will be a higher interest rate and require a higher deposit that your current residential mortgage. So if your “ little equity” is less than 25% you will need to find a bigger deposit.

Remember landlords pay tax on all of their rental earnings (less allowable expenses) and then claim back a tax credit equivalent to 20% of annual mortgage interest, even if you are a higher rate tax payer.

You will also need to watch if your rental income pushes you into a higher tax band eg if you have a taxable rental income of £8k to declare and you a earn a salary of £43k , you’d be pushed over the higher-rate tax threshold of £50,270.

There are more than 150 laws and regulations that apply to landlords so you probably want to use a letting agent.

Remember that if a tenant doesn’t pay rent it could take you a year and a lot of court costs to evict them. So unless you have the income to pay both mortgages for that time you might want to take out insurance.

So you’ll need to factor all these costs into your calculations, as well as compliance costs , repairs and maintenance, regular redecoration, voids etc

Also would advise you go to a mortgage broker that covers whole of market rather than your bank, they can look at both at once

You may need a lower deposit for your residential and leave higher equity in BTL

Will you manage it yourself or use an agent? There are good checklists on landlord sites but there is a lot to make sure you do

@I0NA

Remember that your new BTL in your current house will be a higher interest rate and require a higher deposit that your current residential mortgage. So if your “ little equity” is less than 25% you will need to find a bigger deposit.

Remember landlords pay tax on all of their rental earnings (less allowable expenses) and then claim back a tax credit equivalent to 20% of annual mortgage interest, even if you are a higher rate tax payer.

You will also need to watch if your rental income pushes you into a higher tax band eg if you have a taxable rental income of £8k to declare and you a earn a salary of £43k , you’d be pushed over the higher-rate tax threshold of £50,270.

There are more than 150 laws and regulations that apply to landlords so you probably want to use a letting agent.

Remember that if a tenant doesn’t pay rent it could take you a year and a lot of court costs to evict them. So unless you have the income to pay both mortgages for that time you might want to take out insurance.

So you’ll need to factor all these costs into your calculations, as well as compliance costs , repairs and maintenance, regular redecoration, voids etc

These are all excellent points.

What you are proposing is actually known as a let to buy (rather than but to let).

If you have little equity in your existing property you may qualify for a BTL mortgage which requires a decent amount equity and rental income equivalent to 125% of the monthly mortgage interest.

See a broker and iron out figures.

I've found that letting agents (the good ones anyway) will have some advice on BTL, it is a huge industry so there is plenty to read online with blogs etc, I did a quick google and found this one for example -

oasis-living.com/blog/buy-to-let-mortgage-the-ultimate-guide/

Hope it helps :) :)

@I0NA thank you for that really informative post. lots of points to consider.
it's hard to know what to do. I know if we extend the current house we'd never get it back but a second mortgage is scary since we're not a very wealth family

@My2favboys you’re welcome. If you would struggle to cover both mortgages ( if you get a non paying tenant or there’s a problem with the property and you can’t let it ) then you really must take out insurance. It’s usually about 1.5- 2% of the rent but there’s lots of Ts and Cs and you’d probably need to use a letting agent ( so that’s another 10-15% of your rent ).

Plus of course your contents and buildings and liability insurance, ground rent, legal fees, mortgage fees, mortgages, compliance costs, voids, repairs and maintenance.

Void costs can be quite high. With the Covid rules you can’t show a property until the tenants have moved out. So you go on day one, have it redecorated / any other maintenance like replacing carpet or worktop, new appliance etc . Say that takes a week .

Then you photograph it, advertise it and do viewings on week 2 and the first person takes it. You need another week to do all the tenant checks, so that’s week 3. Then they give notice to their existing LL, so that’s another month.

So your flats been empty for 7 weeks and you are paying everything as usual PLUS the gas, electric and council tax. Then once the tenant starts you lose perhaps half of the first months rent on expenses .

So that’s 9 weeks with no rent and you are paying lots of extra costs for 7 of these weeks. So maybe the equivalent of 10 weeks without rent.

And that’s assuming there’s no damage when they leave, it just needs some decoration etc.

And you need to have spare cash in case something like a boiler or water tank needs replaced.

Your mortgage lender will have their own figures for how much you can borrow compared to your gross annual rent. They will probably want your rental income to be at least 125- 130% of your mortgage.

They will also stress test it at 5% ( to make sure you can still pay if the interest rates go up ).

You will only be able to borrow 75% LTV on your BTL property ie you need 25% equity.

Ane one of you will need to earn a minimum amount, perhaps about £25,000.

But each lender has their own criteria and of course they are stricter for inexperienced landlords.

There’s a lot to it - it’s not a license to print cash as so many people think. So you are doing the right thing to work everything out now to see what’s the best option for you.

Plus on top of all the running costs mentioned above you'll be liable for additional stamp duty which could eat up a sizable portion of the deposit you've saved for the new place (e.g. you'd be paying a total of £14k on an additional £300k property purchase, Vs £5k if just buying/selling/moving)

We have a buy to let but lose approximately half the rental income to tax and other costs plus pay the mortgage on top. We chose an interest only mortgage and pay off lump sums from the rental income when we can.
Remember as others have said there are a lot of additional costs including a letting agent, checks on tenants, we now pay an accountant, when the house is empty between let's we have to pay 100% council tax and there's also repairs to pay for. We actually only make a couple of hundred pounds a month but our capital is growing as house prices increase. At the moment it's slightly better than sticking our deposit in a savings account, probably worse (but less risky than) shares and if interest rates increase it would be better for us to have savings.
Also when you sell you are subject to capital gains tax on a second property.