Q We own a one-bedroom flat in north London. We bought it in 2007 for £300,000 with a mortgage of 85% of its value and, according to some property websites, it is now worth nearly £500,000. We currently let the flat out and the rental income of £1,840 more than covers the mortgage payment of £1,385 of which about £220,000 remains.
We live in a place big enough for us and our one-year-old child but the rent is very high (nearly £2,400 a month) and it won’t be long before we either want more space or, hopefully, have another child in which case we will definitely need more space. But we won’t be able to afford it in London.
Instead of renting at increasingly higher rates, could we instead switch our mortgage to a let-to-buy in order to release equity, get a new residential mortgage and move into a new home while continuing to let the flat? The ideal would be to keep the mortgage payment down to about £2,200 a month.
We have a joint salary of over £125,000 a year, but assuming a higher rate of interest over the coming years, the maximum mortgage I think I could afford would be about £325,000. The matter is further complicated in that prior to letting the flat, we lived in it and, when we moved abroad for a few years, switched our residential mortgage to buy-to-let. JC
A The fact that you switched to a buy-to-let mortgage on the flat that you let makes things simpler rather than more complicated. Switching to a let-to-buy mortgage is inappropriate in your case as that type of mortgage is for people who are looking to let the home they are currently living in while buying a new home to live in with a residential mortgage. As this is not what you are doing and as you already have a buy-to-let mortgage, to raise the cash you need to put towards a deposit on a larger home, all you need to do is increase your existing buy-to-let mortgage or remortgage with a different lender if that would get you a better deal.
Assuming your buy-to-let mortgage lender would be prepared to let you increase the mortgage to the typical 75% of the property’s value – and assuming that the property websites you have looked at agree with your lender’s valuation of the flat – you could increase the mortgage on the flat to £375,000 which would give you £155,000 in cash for your new home. However, you would only be able to raise that much if the monthly mortgage payment was no more than £1,472 to meet the typical buy-to-let mortgage requirement that the rental income is 125% of the mortgage payment.
Assuming a mortgage of £375,000 over 20 years and a relatively easy-to-find interest rate of 4%, you could easily meet the 125% requirement with an interest-only buy-to-let mortgage of £375,000 as the monthly payment would be £1,250.
On your residential mortgage that you’ll need to take out to buy your new home, your mortgage rate would have to jump to 6.5% to exceed the £2,200 you consider to be affordable (assuming a £325,000 25-year repayment mortgage). Be aware when applying that any expenditure such as childcare costs will be taken into account when the lender is working out how much you can afford to borrow.
Muddled about mortgages? Concerned about conveyancing? Email your homebuying and borrowing worries to Virginia Wallis at virginia.wallis.freelance@theguardian.com
