Can we get a mortgage for a second home?

Q My partner and I bought our first property in March 2005, with a 100% mortgage for £87,000. The property, a one-bedroom flat, has recently been valued at £115,000. We are looking to move up the next rung of the ladder in a year or two, and were wondering how possible it would be for us to keep the flat and rent it out, and get another mortgage for around £140,000 to buy another property.

If it were possible, what would be involved? Would we need a deposit for the next mortgage? We were also hoping to change mortgage lenders in around two years to get a better deal and lower our monthly payments on the flat. Is that realistic?

AL

A To answer your last two questions first, yes, you are very likely to need a deposit for your next property because deposit-free mortgages tend to be aimed at first-time buyers which you no longer are. And yes, it would still be possible to change mortgage lenders in a couple of years' time. But whether you can get a better deal depends not only on what you are currently paying and what you might pay by switching, but also on what you decide to do with the flat since buy-to-let mortgages are typically more expensive than mortgages used to buy a home to live in.

If you simply sell up and put the proceeds from selling your flat towards the purchase costs of your next home you are very likely to get a better deal because, on a property costing £140,000, you could get away with a mortgage of 85% or less of the value of the property which means a better deal on interest rates than you could get by borrowing 90% or more of the lender's valuation. This assumes selling the flat for £115,000, knocking off an estimated £5,000 for estate agent, legal and mortgage fees and stamp duty (at 1% of the purchase price of £140,000) and deducting the £87,000 needed to pay off your current mortgage which would leave you with an estimated £23,000. This also assumes that your joint income is at least £40,000 and that you would be applying for a £119,000 mortgage (that is, a mortgage of 85% of the purchase price of £140,000).

If, on the other hand, you decided to keep the flat on and rent it out, you would end up with a lot less cash to put towards your new home. This is because the most you can typically borrow with a buy-to-let - or more properly 'let-to-buy' - mortgage is 80% of the value of the property to be let out. So if you took out a buy-to-let mortgage of £92,000 (that is 80% of the flat's value of £115,000), you'd be left with £5,000 after repaying your current mortgage of £87,000. And although you wouldn't have to pay estate agent's fees if you decided to let the flat rather than sell it, legal and mortgage fees - together with stamp duty on the purchase of your next home - could easily reduce the amount of cash you have available for a deposit from £5,000 to around £3,000 (if not less).

Another limiting factor in the size of the buy-to-let mortgage you can have is the rent you would be able to charge. Most buy-to-let lenders insist that the yearly rent is equal to 125% of the interest payable on the mortgage. So assuming an interest rate of 5.5% (which may be slightly optimistic), the yearly interest (on a £92,000 mortgage) would be £5,060. The yearly rent would therefore have to be £6,325 (£5,060 multiplied by 125%). So to qualify for a mortgage of £92,000, you would have to be able to charge at least £525 a month in rent.