How does our portable mortgage work?
Q: My partner and I currently have a portable discounted variable mortgage deal. There is about £125,000 outstanding, and the estimated value of the property is around £400,000.
We are based in north London, but I have been offered a job in Somerset and we are making plans to move. My partner is taking a career break, so how much we can spend on our new home will depend on my next salary (which is about £70,000), any equity we release, plus £8,000 savings.
We are considering two options: either selling in London and buying in Somerset, or converting the London property to a buy-to-let mortgage, withdrawing the equity if possible and porting the current remaining mortgage to the new Somerset purchase.
We are unclear how all this works and would value your advice. In particular, how we would access the equity in the London property if we keep it to rent, and how this would combine with our current mortgage to allow us enough to buy a suitable property in Somerset, approximately £450,000. EK
A: The simplest route is to sell up in London and buy in Somerset. The fact your mortgage is portable means you should be able to take out a mortgage on a house in Somerset up to the amount of the original loan on your London home, and on the same terms – that is, you could carry on with the same discounted variable deal.
You don't actually take the mortgage with you as the loan is secured on the property you are buying with it. So the mortgage on your London home would be paid off and a new mortgage set up on the Somerset property. If the sale proceeds were £400,000 from selling your London house, after repaying the mortgage you would have £275,000 in cash to put towards your new home. You need to check with your lender whether there are any time limits on "porting" the loan.
If, on the other hand, you decide to rent out your London home, what you would have to do is take out a buy-to-let mortgage on it and, with the cash raised, repay the residential mortgage you have with your current lender. In the current climate, the most you will typically be able to borrow is 75% of the value of the property. So taking out a buy-to-let mortgage could provide you with £300,000 which, after paying off your current mortgage of £125,000, would leave you with £175,000 in cash to put towards a new mortgage on a property in Somerset.
With a buy-to-let mortgage you also need to be able to prove that the rent will cover the mortgage repayments by 125% based on a professional valuation of the potential rental income. So the amount you can borrow on a buy-to-let mortgage is also determined by market rent. You may still be able to port your discounted variable mortgage deal to the new residential property in Somerset, but it is worth double checking with your current lender.
Virginia Wallis, The Guardian 03-02-2010