JOE AND LUCY, right, own a property that they have converted into two flats. They think the flats are worth £200,000 in total and have no mortgage on them. They want to buy a bigger house, which could cost anything from £250,000 to £380,000. They would prefer a long-term fixed-rate mortgage and can afford £1,200 monthly repayments. But, with no deposit, will they have to sell the flats?
Jonathan Cornell, of Hamptons Mortgages, says: Joe and Lucy could sell one or both flats, or keep them and try to raise mortgages on them. As the property has been split into two flats, Joe will need to ensure that both properties have separate titles and are on a leasehold basis, because without this it will be difficult to sell them or raise mortgages on them. They can raise 85 per cent mortgages on both flats. Mortgage Express is happy to offer buy-to-let mortgages on converted flats, provided that they are fully self-contained.
If both flats are worth £100,000, they could raise £85,000 on each, even if they are not currently let out. As the flats do not have mortgages at the moment, Joe and Lucy would not qualify for “fees-free” remortgage deals from Mortgage Express. Mortgage Express has a good 5.49 per cent rate, which is fixed for three years, with a £599 fee, as long as the likely rental is £486 per month, ie, 125 per cent of the monthly cost of the mortgage on an interest-only basis.
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Assuming that this is the case, Joe and Lucy could free up £170,000. With a maximum payment of £1,200 a month, they could afford a £205,000 repayment mortgage over 25 years at 5 per cent. Northern Rock has a good flexible three-year fixed rate at 5.29 per cent, which allows for overpayments. Northern Rock bases its income multiples on the client credit score: a medium score would mean that Joe and Lucy could borrow up to 3.8 times their joint income, but this would cost them £1,372 a month. To stay within their budget, they’d need to keep their borrowing below £200,000. They should set aside at least £15,000 for stamp duty and costs, which would allow them to buy a property with a value of £355,000.
Hamptons: 020-7220 1000
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Simon Tyler, of Chase de Vere Mortgage Management, says: Joe and Lucy need to be a little more realistic about their target mortgage payments, especially if they buy a property at the upper end of the price range. To give an idea, a £380,000 repayment mortgage at a fairly typical rate of 5 per cent would cost £2,221 a month. Even their minimum target price of £250,000 would cost £1,461. Without a deposit, not only will they be lucky to get a mortgage rate as low as 5 per cent, they may also struggle to find a lender prepared to advance more than £250,000.
Certainly there are not many who will lend more than £300,000 on a 100 per cent basis. So I would suggest that Joe and Lucy take out some equity to give them at least a 10 per cent deposit, and perhaps a little more to cover extra costs such as stamp duty and initial buying expenses. But even then they will still struggle to hit their budget. The best five-year fix is from Portman at 5.10 per cent, which would mean repayments of £1,493, based on a £250,000 mortgage. Three-year deals cost about the same at the moment, but a five-year deal would give them peace of mind for longer.
Variable rates are cheaper, but even the best discounted trackers do not hit their target. Birmingham Midshires’ two-year discounted tracker at 4.10 per cent would mean repayments of £1,348 on a £250,000 mortgage.
If it is essential to hit this £1,200 budget, then it may be necessary to sell one of the flats. If they can put £100,000 down on a property, they could borrow £200,000 at a cost of £1,194 a month, based on the 5.10 per cent five-year fixed rate, allowing them to spend up to £300,000 on their new home.
They could rent out the other flat, which would give them extra income. If they want a more expensive new home, the only viable option would appear to be to sell both of the flats and put down a much larger deposit.
Chase de Vere: 0800 3580538
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