I’m battling negative equity, a starter home and a growing family. Should my husband and I turn our home into a buy-to-let so we can move somewhere bigger?
When people meet me for the first time and hear that I’m a finance journalist, they often assume I must have loads of insider knowledge. They picture me with my ear to the City, buying gilts and getting tips from Sir Mervyn King.
Alas, that’s not entirely true. Or even remotely true. In fact, I managed to buy my very first home in December 2007, a matter of months before the financial crisis rocked the housing market to its core.
Back then, I told lots of people that the house wasn’t an investment, it was our home. But that was because I thought prices in my town weren’t going to rise - I didn’t expect them to fall by around 15%!
And now things are getting cramped. My husband and I had a baby, and would like to think about another one within a year or two. However, we’re stuck in the starter home that we’d initially planned on keeping for three years at the most.
Property simply isn’t selling just now – there are identical homes for sale on our street and they’re not going anywhere.
So we’ve started to question whether we could rent our home out and move up the ladder.
Could we get a buy-to-let mortgage?
It took around three minutes to find the answer to this: no. We’ve ploughed our savings into getting out of negative equity.
But to get a buy-to-let mortgage, we’d need a deposit of at least 35% and ideally 40% to qualify for the very best deals. It seems that no one’s offering 100% loan-to-value mortgages these days. Bah, one little global financial crash and everyone loses their nerve.
However, another option would be to get consent to lease from our mortgage provider. So I gave the mortgage team a ring…
Consent to lease
Negative equity has trapped many people in homes that are no longer suitable, perhaps because their families have grown or perhaps because they need to move for work.
As a result, many lenders allow customers to switch their mortgages over to ‘consent to lease’ deals, which are not the same as buy to let.
The trouble with consent to lease is that the lenders don’t want customers using them to set up investment portfolios – they’re not meant to replace buy-to-let deals.
Instead, they’re for unintentional landlords; people like us who are trapped by the housing market but need to change location or upsize.
To prevent homeowners using them as funding for investments, the rates are pretty uncompetitive. My lender offered us a three-year fix at 5.69%, with a fee of just under £1,500. There’s also an early redemption charge (ERC) of 3% before March 2015.
To put that in context, we currently pay 3.5% on its standard variable rate (SVR) and the best buy-to-let mortgage on the market is a two-year fix at 3.59%. If the market picked up in the next couple of years and we were able to sell, we’d then have to pay the ERC. This could be a very pricey decision.
Another option was a three-year tracker, with no ERC. That’s also 5.69%, but if base rate started to climb, we’d be paying through the nose. The fee for that mortgage would be £599.
What if we can’t sell in three years time?
What if the housing market remains stagnant for more than three years? The bank is only willing to grant consent to lease for a three-year period. We’d be in a much worse position in three years if we couldn’t regain consent to lease and had a property we couldn’t remortgage.
[SPOTLIGHT]Fortunately, the bank was pretty relaxed about this. Although it wouldn’t guarantee that we would be granted consent to lease again, it said it was highly likely. As long as our intention was to sell once the market picked up, we’d be okay to continue letting it.
What’s the rental market like?
Of course, there’s no point in arranging consent to lease if we’d struggle to find tenants for our home. On paper, though, it looks like we wouldn’t have a problem. The Association of Residential Letting Agents predicts that rental growth will be strong this year, partly due to the stagnant sales market.
To get a feel for the local market, I spoke to three letting agencies in the area and they were all confident they could find residents within a month. There’s demand for our kind of starter home – it’s exactly what these prospective tenants would be buying if they could get a mortgage themselves.
Predicted rents would just cover the mortgage and letting agent’s fees, as long as we had tenants for 10 months out of 12. As extraordinarily inexperienced as we are, it wouldn’t seem sensible to try to go it alone.
But there’d be no spare rental income for any repairs, or wear and tear. Talking to letting agents and other residential landlords, it seems likely we’d be looking at £1,000 a year on average for such expenses. So if we couldn’t sell for three years, that’s potentially £3,000 lost. And if we did sell before then, we’d pay a hefty ERC.
However, if we put our house on the market now, we’d need to undercut the other properties for sale on our street. We’d lose a lot more that way.
What would you do?
So there’s my predicament. We’re unlucky enough to have bought right at the peak of the market. However, we’re in a better position than some as we’ve been overpaying the mortgage since then and are no longer in negative equity.
Do we gain consent to lease and rent a bigger place? Save for a deposit on a new property, then let our current home and hope someone will give us another mortgage too? Sit tight and hope the property market gets moving again and homes start selling?
For now, I think we’re going to sit tight. We rushed into buying and that’s not been the greatest financial move we ever made. What would you do?