Selling is not the only option.
I’ve been asked by clients if is there a way of using the equity in their home towards an ongoing purchase whilst keeping the property as a long-term investment. The simple answer to this is yes.
If you’re releasing funds from your home on this basis, it’s referred to as a Let to Buy mortgage.
There are various upsides to releasing funds out of your current residential property towards your next home, the main one of course is the ability to keep your current property as an investment and benefit from any future growth in value.
It also means you don’t have to sell your property in order to buy another. Depending on where you live, selling a property on the open market can be stressful and costly.
Thirdly, the rental income from the first property will be a source of income.
There are also some potential downsides to consider but I will cover these later. Let’s first discuss what you could do and how this would help.
Generally, mortgage lenders will release up to 75% of the value of your property on a Let to Buy basis.
This means if you have a property of £250,000, with a current outstanding mortgage of £125,000 you could release a further £62,500 towards the deposit for your ongoing purchase.
Property value = £250,000
75% of £250k = £187,500
Less outstanding mortgage of £125,000
Additional mortgage = £62,500
This would result in a Let to Buy mortgage of £187,500 on your current property and given today’s low interest rates the monthly cost for this mortgage could be around £350 on interest only terms. I have based this on interest only terms as usually my clients would structure a let to buy mortgage in this way and repay the debt by selling the investment property in the future.
In this scenario, you have £62,500 as a deposit for your ongoing purchase.
Things to consider
- Stamp duty charges. There will be an extra 3% stamp duty to pay on your ongoing purchase as it will be a second property. This can be a significant cost so needs to be factored in.
- When you rent your property out, there are tax implications for any income (see my previous blog), so for couples, it can make sense to transfer ownership to the low rate taxpayer if possible.
- If this would make you a first-time landlord, make sure you put funds aside for rental voids.
As with any big decision, first seek advice from the professionals. See if it is possible to release the equity from your existing house before you factor that in for your ongoing purchase. Consider the costs of selling and the costs of buying and any long-term tax implications, if you don’t know ask!