Ask a planner answers: Remortgage in order to Buy to Let?

Tuesday, June 7, 2016

The question from Anon.

I am considering remortgage my current flat to raise some capital to buy a second property ('rent-to-buy'. I would remortgage 100k (the flat is worth £380k), this would give me an interest only mortgage of £240k. Myself and my partner would then have a 30% deposit on a new property. We could comfortably afford the mortgage repayments on the new property (which we would move into) and could rent the existing property out for at least double the monthly repayments in that. We both work full time, although I hope to go part time in a few years if we have children. Is this something that is sensible or risky from a financial planning point of view? Thanks for your help.

Answer from Stuart Dewin CFPTM of Questa Chartered

The scenario you are looking at is a Buy To Let Mortgage and not all lenders offer this. It is possible to re-mortgage your existing property and release capital that can be used as your deposit for your new home. It will be set up as a Buy To Let Mortgage and would be assessed so that the rental income covers the mortgage payment by a minimum of 125%, though with some lenders 145% and a stress test rate of 5.5% would be used.

Interest only payment is possible on a buy to let mortgage and the maximum borrowing is 75% of the value of your property, which is determined by the lender's surveyor.  Some lenders also require a minimum income of £20-£25,000.

There is always a risk with a buy to let mortgage, because the mortgage still requires re-payment if there is a rental void and you have no tenant. This should be considered in your income and expenditure that you can afford any shortfall.

Advice should be sought from your accountant as to how the new rental income tax change will affect your tax position, as you may potentially have to pay extra stamp duty on your new purchase.

Stuart Dewin CFPTM
Questa Chartered