Currently, I own a small one bedroom flat worth £92,000 in Manchester outright.
I moved out and rented it for £650 a month, minus a £75 maintenance charge and £55 a month I pay to the letting agency.
I am renting a one bedroom flat at a cost of £800 a month. I earn £25,000 a year.
I was thinking of taking £50,000 out of the flat I own to put down as a deposit towards a £100,000 house I would buy.
Mortgage help: Our weekly Navigate the Mortgage Maze column stars broker David Hollingworth answering your questions
This would leave me with a mortgage of say £50,000. Plus the £50,000 borrowed on a buy-to-let mortgage I would be taking out on my flat.
The mortgage rates I have been offered are very high. I will be charged 9.8 per cent on the buy-to-let remortgage on my flat for £50,000.
Then I will get 7.9 per cent on the residential mortgage for the £100,000 house I wish to buy.
Would you hold fire until 2026 when I could sell my flat and just buy the house outright with extra monies saved during these next few years?
I feel I am being conned by these high interest rates.
And it would be wiser to wait where I can buy the house for cash or at least the majority in cash.
Also if those interest rates went any higher in the future, I could maybe struggle to pay both mortgages.
What would you suggest? Am I thinking correct? I am also concerned about the extra 3 per cent stamp duty charge when buying a second property, J.M.
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David Hollingworth replies: It’s good to take your time to reach a decision, rather than rushing into something that could leave you stretched.
It’s always worth thinking of the possible consequences before taking on debt, especially when you are in the fortunate position of currently having no mortgages at all.
The decision to move out of the existing property and let it could have stemmed from a need to move area for work, or because the property was no longer suitable for your requirements.
We’ll therefore assume that you would not move back to the let property to cut costs.
Could you sell?
Perhaps the most obvious route is to sell the existing property before, or at the same time as, buying a new main residence.
That would avoid taking on a substantially bigger debt than you might otherwise require to complete the purchase of the new home.
Selling the let property will release the equity enabling it to be put into the onward purchase.
If there’s a shortfall between the amount you can put down and the purchase price, a mortgage could make up the difference.
> How to remortgage your home and find the best deal
Hollingworth suggests the most obvious route is to sell the existing property before, or at the same time as, buying a new main residence
That would still total a much smaller amount of borrowing than using a buy to let mortgage plus a mortgage on the new home.
Your hesitation in selling currently may be due to existing tenancy commitments or you may be concerned that you will struggle to sell the property in a quieter market but I think that it’s worth considering this approach.
It would also help you avoid the 3 per cent stamp duty surcharge on additional property.
Buy to let option
As you’ve discovered, it could be possible to borrow against the let property to release equity now with a view to selling in the future.
Buy to let lenders will typically base the level of available borrowing on the rental income covering the mortgage interest by a certain margin, typically between 125-145 per cent.
That will be calculated at a stressed rate to ensure that the property would wash its own face, even if rates were to rise.
The current rental income should on the face of it be adequate to meet lender criteria to cover the level of borrowing that you’ve proposed.
> The best buy-to-let mortgages for landlords
Warning: Some buy to Let mortgages can carry big fees but at this level of borrowing they could make a big addition to the overall cost, warns Hollingworth
One thing that will be important is to factor in any associated costs. Some buy to let mortgages can carry big fees but at this level of borrowing they could make a big addition to the overall cost.
Lenders do offer a range of options though with many offering deals with no arrangement fees and other incentives to help.
You should also think carefully about how long you lock in for if you think that you may want to sell the property further down the line.
Understand the recommendation
Your current research does seem to have resulted in rates that are higher than could be found from some of the mainstream buy to let lenders. Fixed buy to let rates without any arrangement fee can be found a little over 5 per cent.
However, the higher rates that you have been recommended may be for a particular reason and tailored to your individual circumstances.
That could for example reflect if there are any blips on the credit file or could be down to the property being non-standard and limiting the choice.
So, there may be a good reason that the recommended rates are higher but if you’re not sure it makes sense, get more clarity from your adviser to understand lower rates may not be an option.
It’s also important to understand the range of fees that may be payable, as these will only add to the cost, whether it’s a product fee or a broker charge.
If you’re not sure then you could of course try an alternative adviser to see if they have a different suggestion.
Some advisers, including ourselves, do not charge a broker fee.
Be sure to look for an adviser that can consider lenders from right across the market.
In summary, think about the right timing for you to sell and whether you could avoid the need to take on two mortgages.
That’s especially true if you ultimately see this as a short-term solution and you intend to sell in the longer run.
If you proceed with the buy-to-let option make sure you understand the rates on offer and any possible knock on to your longer term plans.
> True cost mortgage calculator: Check what a new fixed rate would cost
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