Q My girlfriend has a flat that she bought at the end of 2007 for £80,000 with a £60,000 mortgage. She currently has £47,000 outstanding on her mortgage with payments of around £350 a month.
We are looking at changing her mortgage to a buy-to-let mortgage to enable us to buy a house and rent the flat out. Based on the rental income of other flats in the same complex, she could get a rental income on the flat of £400 to £425 a calendar month.
We have a joint income of £52,000, and we both get paid every four weeks, so 13 times a year. We’re looking at purchasing a house valued anywhere between £150,000 and £185,000 and have £20,000 in savings for a deposit.
Is it possible to increase the mortgage on the flat when changing it to a buy-to-let mortgage so as to generate more capital with which to purchase a home? If this was not possible, where do you think we stand on changing the mortgage to a buy-to-let, and purchasing a house with £20,000 in the bank? TD
A Based on the figures you have given, increasing the mortgage on your girlfriend’s flat when converting it to a buy-to-let doesn’t at first appear to be an option. That’s because buy-to-let mortgage lenders typically expect rental income to cover monthly mortgage payments by 125%. For the flat’s rental income to do this, your girlfriend would need to charge £437.50 a month in rent. However, the rental income calculation could be made to work if your girlfriend switched from a repayment to an interest-only mortgage which would reduce her monthly mortgage payments.
Assuming an interest rate of 4.5% on a £47,000 interest-only loan, this would mean a monthly bill of £176.25 which a rental income of £425 would cover amply. So converting to an interest-only buy-to-let mortgage could mean that you could increase the size of the mortgage to as much as much as £90,000 and still cover the mortgage payment by 125% (again assuming an interest rate of 4.5% and rental income of £425 a month).
But to be able to borrow that much, the lender’s valuation of the flat would have to be at least £120,000 as the most you can typically borrow with a buy-to-let mortgage is 75% of a property’s value.
Making sure the rental income covers the buy-to-let mortgage also has an effect on the amount you can borrow for your joint property. When calculating the maximum they are prepared to lend you and your girlfriend, mortgage lenders will generally not take the buy-to-let mortgage into consideration as a commitment as long as the rent covers the monthly mortgage payments. If it doesn’t and there is a shortfall on the buy-to-let rental, some lenders will annualise the shortfall and class it as a credit commitment which affects how much you can borrow.
Muddled about mortgages? Concerned about conveyancing? Email your homebuying and borrowing worries to Virginia Wallis at virginia.wallis.freelance@theguardian.com
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