Q I rent my house out to a friend for £600 a month. My mortgage for the property is £623 a month and I have nine years left on it with £63,000 outstanding. The house is worth approximately £120,000 so I have £57,000 in equity.
I am looking to buy a new home with my wife for around £130,000. She too, owns a property worth £115,000, pays £450 a month for her mortgage and has about £20,000 in equity. We don’t know whether to sell both properties and buy a new house, or alternatively rent one of them out. But we think owning three houses could be too risky.
Could I charge my friend £780 a month – which is 125% of my £623 mortgage payment – and take equity as a deposit for the new house? MF
A I think the friend to whom you let your house is best placed to tell you whether he or she is prepared to see a 30% increase in the rent. It could well be that you’ll have to find yourself a new tenant. Besides, increasing the rent isn’t the way to get at the equity you have in the property. To do that, you need to either sell the house or increase the mortgage on it.
The most you can borrow with a buy-to-let mortgage (which is the kind you need) is typically 75% of the value of the property. In your case, that would mean the most you could increase your mortgage to would be £90,000 (75% of £120,000) so the most cash you could release to put down as a deposit on your new joint home would be £27,000 (the difference between the increased and current mortgage amounts).
However, if you were to increase your mortgage to the £90,000 level, your monthly mortgage repayments would also go up. To satisfy any buy-to-let lender, the rent you are able to charge – as determined by an independent valuation – must be 125% of the mortgage payment. If you were able to borrow at a competitive rate of 3.5%, your monthly payment on an interest-only basis would be £262.50 meaning that you would have to charge at least £330 in rent per month. This would be the same whether you stuck to your current nine-year term or extended it. You would, however, need some way to repay the mortgage at the end.
If you arranged the mortgage on a repayment basis – which is unusual for buy-to-let mortgages – you would need to charge rent of just over £650 and have a mortgage term of 20 years. If you arranged a repayment mortgage over 10 years, the rent would have to be £1,111 a month which is totally unrealistic given what you currently charge.
Choosing to let your wife’s property isn’t really an option as her mortgage is currently greater than the maximum 75% loan typically required by buy-to-let lenders.
If you chose to sell both houses, you would have £77,000 in cash to put towards a new home (your equity of £57,000 plus your wife’s £20,000) and would need a mortgage of £53,000. You would also no longer have the worries of being a landlord.
Muddled about mortgages? Concerned about conveyancing? Email your homebuying and borrowing worries to Virginia Wallis at virginia.wallis.freelance@theguardian.com
