Wealth Check: How easy is it to walk the let-and-buy tightrope?
Saturday 07 August 2004
Jenny Hodge and her partner are looking to buy a house in a "nicer" area of London, with a budget of about £350,000. Ideally they would like to let out their current home, which is near London, but they are unsure whether they can afford to do this.
Although Ms Hodge has a steady income, working for an international company, her partner is a bass player in a band and therefore his income is variable. The couple do not drink or smoke, nor do they spend much on going out: their main expenses are buying DVDs, CDs and clothes. But they know they need to be careful about taking on a larger mortgage.
Ms Hodge has been told by her current lender that she cannot buy a new property and let the existing one through them, but that there might be other options from other lenders.
We put her case to David Higgins at Glazers Financial Services, Anna Sofat at Destini Fiona Price and Alex Ruthven at AM Ruthven.
JENNY HODGE, 35, COMMUNICATIONS MANAGER
Salary: Joint household salary about £65,000
Property: Home valued at about £280,000, with an £85,000 tracker mortgage from Cheltenham & Gloucester
Savings: £30,000 jointly in ISAs and savings
Investments: Some shares
Pension: Company pension (partner none)
Outgoings: Mortgage £600 per month, bills £200, car £225, other £200
SAVINGS AND INVESTMENTS
Ms Sofat says that Ms Hodge should review - or have an adviser review - her savings and Isas, including her small shareholdings. Quite often investors buy funds but fail to keep track of their performance.
Mr Higgins stresses that with a relatively large amount of money saved, the couple should be ensuring that they are making as much interest as possible on their savings, and taking full advantage of their Isa allowances. Abbey currently has the best cash Isa rate, with Cahoot offering a good rate - 5.5 per cent initially - for savings above the £3,000 annual cash Isa allowance.
Assuming they do not need the money for moving house, Mr Ruthven suggests that Ms Hodge and her partner could split their savings between an instant-access cash account and long-term deposits on the one hand, and longer-term stock market investments on the other. A qualified stockbroker could review their shares and advise them on where to go from there.
Ms Sofat calculates that Ms Hodge and her partner could borrow 2.75 times their joint income: £178,750. That would cost £1,070 a month, which should be affordable. Selling her current property would release equity of about £200,000. This is more than enough for a deposit on the new home as well as moving expenses, and should leave some extra funds, either to reduce the mortgage or for savings.
An alternative way to work out the new mortgage is to take four times the higher income and one times the lower, says Mr Ruthven. Lenders will also take any other debts such as car repayments into account when working out how much they can borrow. This should give the couple scope to borrow between £200,000 and £230,000.
Mr Higgins points to a mortgage with Yorkshire Building Society, fixed at 5.39 per cent until September 2007, as attractive. The society will lend up to four times the couple's joint income and up to 75 per cent of the value of the property.
LET TO BUY
Lenders usually see buy-to-let properties as self-financing, and so do not take the mortgage into account when working out how much someone can borrow for their own home. Mr Ruthven says that most buy-to-let lenders want to see a rental income of 125-130 per cent of the mortgage interest charges.
Mr Ruthven and Mr Higgins both say that Ms Hodge's first port of call should be a local letting agent, to work out how much their home would fetch.
Mr Higgins says that Ms Hodge could arrange a buy-to-let loan. A specialist lender such as GMAC would lend up to 95 per cent of the value of the property, but rental income needs to cover 130 per cent of the mortgage interest, based on GMAC's standard variable rate of 6.49 per cent.
But Ms Sofat cautions that rental yields have fallen recently and are now in the region of 5 per cent. With buy-to-let mortgages typically costing 5.5 per cent, after taking off a first-year discount, this means that a large loan in relation to value is not an option.
Mr Ruthven suggests that the couple should consider selling their existing property, as it will reduce the mortgage they need for their new home. Ms Sofat says Ms Hodge could sell her home and invest in a cheaper buy-to-let property, but this is a high-risk strategy.
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