Frequently Asked Property Investment Questions – Using a Buy-To-Let Mortgage to Downsize

Lucia France: A question for Paul is, my elderly parents really need to downsize their house to release some capital to assist with their pensions, and also to live in a more manageable property. This process will be traumatic for a number of reasons. They’re not going to handle the sale by process very well, so it would be great if there was a better way to reduce the pressure on the move. The house is worth around 285 K, and there is no mortgage. They would like to downsize to a smaller property, and it looks like something suitable could be found for around 230 K-ish. After costs that would leave a sizeable chunk of money to live on. Could a buy to let mortgage be used on their existing home to release capital to go and buy a new home? The existing house would be sold as soon as possible after they were in the new home, and I realize there would be cost incurred for closing that off. So Paul what’s your answer to that?

Paul Mahoney: Okay. There’s a couple of different options and things you could look at here. I understand the buying and selling process in the UK is a real headache. The government’s working on improving that at the moment, but that will be a slow process and who knows what the outcome of that will be. So we’ve got a property of 285,000, looking to downsize to a property of 230-odd-thousand, so you’ve got 50 … about £50,000 there depending on your parents living costs. I wouldn’t say that’s a very sizeable chunk of money, especially after costs.

So a few things you can look at, with the existing property, you could look at an equity release type product, or what’s often referred to as a reverse mortgage. Meaning that, you’re able to release equity from the property that your parents own, and they could use that to live off, or to rent elsewhere, or potentially even buy elsewhere. But, you’d need to look at what the purchase of the buy … the purchase of the property elsewhere is going to be, because for example, whether it be an equity release or whether it be as you suggest, a buy-to-let mortgage on the property they currently own, they would then need to, I assume, take a mortgage on the property they’re buying as well, which would be a residential mortgage and would be a lot more difficult to obtain then the buy-to-let mortgage.

So, some buy-to-let lenders will lend to people that are quite elderly. Some buy-to-let products will lend up to the age of 100, which surprises a lot of people. But the reason they’ll do that, is because the lender is assuming that there’s rent coming in from the property they’re lending on, and that is the serviceability for that buy-to-let product. That’s very different for a residential mortgage, where the serviceability is the actual income of the person’s living there. Now I assume from what you’ve said, your parents are elderly, and perhaps retired, perhaps they don’t have any income, or they might have a small pension, but I would be surprised if that was enough to get them a residential mortgage to then go and buy elsewhere.

They could look at something like a bridging product, which is a short term finance product, however, they are … they tend to be quite expensive. You’d be looking at the sort of range of sort of half a percent to two percent a month of the loan amount, so depending on how long it’s going to take your parents to sell their home, that could be quite a costly loan.

It seems from the situation, just on the surface, and I don’t have all the information, but it seems the idea of selling a property for 285, buying one for 230-odd, and having enough to left over to live on, is probably not something that’s really going to work, and perhaps your parents may need to reassess their options as to whether they stay in the current property, or whether the downsize property be a cheaper property to leave more of a buffer. And obviously, the more of a buffer, the more options you have, because you can look at those more costly options and they not necessarily hurt your bottom line quite as much.

As anything, generally with this show, seek professional advice. The answer I’ve just given you is based upon very limited information, so what you should do, is speak with a professional, provide them with all of the information, they can give you an idea of what the outcomes might be, what your options are, and then you can make the decision that works best for you.

Lucia France: That’s great. Thank you very much, Paul.

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