Wealth Check: How easy is it to walk the let-and-buy
tightrope?
Published: 7th August 2004
By Stephen Pritchard
This article appeared in The Independent
Save and Spend Supplement.
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
Debt: None
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.
MOVING HOME
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.
