CLAY and his friend Ben want to club together to buy a property. Each already owns a home, which they hope to let out when they buy their new place. They want to find out how their plans affect their current mortgages: Clay has a ten-year fixed rate with redemption penalties until 2013. What kind of mortgage could they get for the new purchase?
James Cotton, of L&C, says: If Clay lets out his current property, he should make his lender, Halifax, aware. Normally he would have to consider a buy-to-let mortgage, but Halifax should allow him to continue on his current rate and simply charge an administration fee of £75. This means that Clay would avoid the redemption penalty, which at 5 per cent would be more than £9,200.
To raise the funds Clay and Ben need on the new property, they need to find a lender who will consider their other properties as self-financing, because their salaries alone are not sufficient to service all three mortgages.
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They want to buy a new home for £250,000. Based on their incomes, they should be able to get a loan for 95 per cent of the property value — this figure is the loan-to-value ratio (LTV). However at high levels of borrowing (over 90 per cent LTV) lenders often charge a fee called a Mortgage Indemnity Guarantee (MIG). MIGs should be avoided where possible as they can amount to thousands of pounds.
Northern Rock would consider lending the money they need for their new home. It offers a two-year fixed rate at 5.59 per cent. The fee is £595, and Northern Rock will not charge a MIG.
Clay and Ben would like to keep their monthly payments under £1,100 — but based on current rates they could do this only if they went for an interest-only loan. This would leave no capacity for them to invest in a repayment vehicle and they will have to think carefully about how they plan to pay off the capital when the mortgage matures. If they took a repayment loan over 25 years, their monthly payments would be between £1,400 and £1,500.
If Ben and Clay go ahead with their plan, they will have to meet the monthly payments on all three mortgages, regardless of whether or not they have tenants in the rental properties. There are also other costs involved in running the buy-to-let properties, so I recommend that they both build savings to provide a buffer. L&C: 0800 373300
Peter Barrett of Mymortgagedirect.co.uk, says: Clay is in the classic penalty trap that affects so many borrowers with long-term fixed rates. While his current Halifax ten-year fix at 5.49 per cent is not a bad rate, he may have been better off hopping from one short-term discount deal to another every two years or so. The penalties on his current mortgage are too severe to make a switch worthwhile.
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He has relatively low repayments of £865 a month: this is because he is on an interest-only deal. Although initially attractive, this means that he is not making any reduction to the mortgage debt. If there is a slowdown in property prices, then the value of the property at the end of the mortgage term may not be as high as Clay had hoped. Letting the property will pretty much cover the mortgage, but he should make sure he has a good savings plan — perhaps a long-term fixed rate bond that would pay about 6 per cent. Mymortgagedirect: 0800 9530606
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