Q I have a two-bedroom flat in north London which I own outright. It was valued back in June by three local agents at an average of �385,000.
I would like to buy a property in Hertfordshire and am trying to work out if I will be able to keep my flat as a rental investment and borrow enough to cover the cost of the second home that I intend to live in myself. I'm looking at properties in the region of �150,000 to �180,000.
I work freelance but am not registered as self-employed as I am always taxed at source. I have proof of earnings for the last three years and my annual salary is roughly �30,000.
I have been told that I can achieve a rental income of �375 a week. This would take my annual salary closer to the region of �50,000 if lenders would accept it as part of my overall salary. Do you think this is likely?
Also, would I need a deposit or would the collateral that I have in my flat be accepted instead? I can just about scrape together a deposit of about �15,000 but I'd prefer to retain this for possible modernisation works if I can. HT
A To use the flat as collateral for your new home, you would need to secure your borrowing on it, so you would need to take out a buy-to-let mortgage. To answer your first question, yes it's highly likely that buy-to-let lenders will take rental income into account when assessing mortgage applications. Indeed, most buy-to-let lenders look only at rental income with only a handful of lenders assessing earned income as well. What lenders typically want to see is that the rental income will cover the monthly mortgage payment by 125%. Assuming that a lender would also value the rent you could get on your flat at �375 a week, you should easily satisfy the 125% requirement. With a 25-year mortgage of �180,000 with an interest rate of 4.5%, the monthly repayment would be just under �1,000 so the rent would have to be �1,250 a month to cover the mortgage by 125%. In fact, the monthly equivalent of �375 a week would be �1,625 ? so nearly �400 more than you would need to satisfy a buy-to-let lender.
The other main factor lenders take into account is the loan-to-value (LTV) ratio. Again assuming that a lender would match the valuation of your London flat, with a mortgage of �180,000, you would be looking at an LTV of 48% which is a lot lower even than the lowest LTV of 60% that some buy-to-let lenders require. So you should be able to raise the full �180,000 you need to buy a property in Hertfordshire without the need to provide a deposit.
Source: http://www.guardian.co.uk/money/2011/oct/26/london-flat-country-house-mortgage-deposit
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