How can I make a second property pay?

20 September 2012

Q

Is there any way of releasing some equity from a second property I own? The value of the property is about £285,000 and I have a £81,000 buy-to-let mortgage on it with tenants paying £550 per month. Ideally, I'd like to access up to £50,000 so I can make a cash purchase of another buy-to-let property to augment my pension. I am 55 and took voluntary severance in December 2010 and my pension pays me £800 per month. I have less than £10,000 in savings.

From
CM, Paisley

A

It is possible to raise additional funds against a buy-to-let property in much the same way as you can remortgage a main residence to release equity. Of course, that is subject to meeting the lender's criteria and there are several issues that may be curtailing your options.

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In basic terms, buy-to-let lenders will want to see that there is adequate equity in the property to allow for equity to be released. The maximum that most buy-to-let lenders can now advance will be 75% of the value of the property, so that should not be a problem in your case.

They will want the rental income to cover the mortgage interest by a prescribed margin, typically 125%. The current rental income could give some flexibility to increase the lending level but borrowing something of the order of £50,000 looks a stretch. For example, taking £130,000 and using an interest rate of 5% (some lenders will use higher) would require rental income of at least £677 per month.

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Even ignoring the buffer required by the lender, that size of mortgage would be charging monthly interest that would eat up the majority of your rental income.

That looks like the main hurdle in your attempt to borrow more but there are some other issues that could have an impact. Many lenders will now require a minimum level of income, typically £25,000, in addition to the rental income, so your current pension income could be a sticking point.

Many lenders now also limit the maximum age to which they will allow the mortgage to be taken to, with many limiting it to 70 or 75. Again, that would reduce the term of borrowing available, although some other lenders like The Mortgage Works can lend to a maximum age of 90.

You perhaps need to consider whether gearing your investment more highly would benefit you overall, especially taking into account the costs of buying another property.