Simon Webster is managing director at Facts and Figures Financial Planning:
“Based on the information provided, I would be asking this client to consider very carefully whether he should be in the buy-to-let market at all. He already has a mortgage of 3.6 times his income and the basic cost of living will represent a large part of his disposable income – leaving little to fund a second mortgage on the buy-to-let property in the event that it remains empty for a period. He certainly needs to take professional financial advice before committing himself to anything.
One presumes he is working full-time and that purchasing a property at auction implies that it will require some money spending to do it up. If these renovations are to be done by the borrower personally then there is a limit to how much he can do in personal time, and meanwhile the mortgage still has to be funded.
In the absence of any spare cash it would be necessary to obtain a further advance or remortgage his existing property to the maximum he could get, based on his income. He should check as to whether a remortgage would trigger early redemption penalties (ERCs) with his existing lender.
85 per cent LTV is generally considered the ceiling by most buy-to-let lenders and utilising a buy-to-let mortgage means that it would also be necessary to cover the mortgage payments with projected rental income plus 25 per cent. Thus if the monthly mortgage payment was £500 per month rental income would need to be £625.”
Adrian Kidd is an IFA at Mint Financial Planning:
“The main issue surrounding a purchase at auction would be to have the property surveyed before bidding to ensure its suitability. This is providing peace of mind that it is worth at least what he will pay for it. Secondly, the price is only a guide price and once bidding commences the price could be significantly more than the guide of £75,000.
He must be very clear on what his budget is and should not go over it. If he does not purchase, it was not meant to be and shouldn’t ‘chase it’.
When purchasing any buy-to-let properties, you must have a very good idea of the rental income achievable and this will help form the basis of the price you are willing to pay for the property. Once the income does not match the mortgage, it makes no sense to pay more, as you will struggle to get a mortgage unless you put down a larger deposit to make sure the calculations work for the lender (and indeed yourself).
Buying at auction, if anything, can be construed as more risky, but you do have the potential to pick up a bargain.
You will need three comparables for rental income from letting agents locally and need to have the mortgage agreed-in-principle (AIP) before bidding, as you will usually have seven to 10 days to exchange, so make sure you have a solicitor to facilitate your urgency.
A usual 15 per cent deposit is needed, although dependent on rental income some buy-to-let lenders will go up to 89 per cent loan-to-value (LTV).”
Mike Pendergast is an IFA at Zen Financial Services
“A maximum buy-to-let mortgage will be 85 per cent and will therefore require a £11,250 deposit from Barnaby. Considering his main residence is worth £115,000 with £90,000 left to pay on his mortgage, in my opinion, he seems to have the following options. Firstly, to raise the £11,250 deposit from his own resources, assuming he has any. A second option would be borrowing the £11,250 on an unsecured loan. He could also raise the £11,250 from his main residence, which would take him to circa 88 per cent LTV on his main residence.
Alternatively, he could let-to-buy, rent out his main residence and move into the second property, which would increase his maximium LTV on the second property, as long as his existing lender is happy to allow him to rent out the main residence. And finally, he could perhaps borrow the deposit from a very kind relative.”
