Mortgage Refinance – Interest Only

I have a large one bedroom flat in London currently let out through a letting agent. The property has been let since 2005 with various tenants on a 6-12 month basis. The property consistently rents quickly with limited gaps as I choose to rent at an attractive price rather than hold out for a higher monthly rent of an additional 50-70 GBP.

I had hoped to sell the property in 2007, but missed the opportunity due to lease issues. I think I am what has recently been defined as a reluctant landlord and I realize in order to keep the property let successfully I need to review my financing and adopted letting approach to date.

I hope through explaining my situation someone may be able to offer advice. Below is a summary of my letting and financial situation and Point 10) summarises what I hope to achieve. If any additional info is required please advise and I will update the post. Any advice is appreciated. Thank you.

Letting & Financial Situation

1) The present value of the property is approx 215,000 – 225, 000. My remaining mortgage 72,000 plus home improvement loan 13,000 approx 85,000. I am the sole owner.

2) I currently have a SVR repayment mortgage and have not informed my lender the property has been let. I believe my SVR rate is very competitive and probably one of the best on the market today. My 25-year mortgage began during the fourth quarter of 1999.

3) The monthly rental income ranges from 780 - 800 and my expenses including agent fees plus vat are approx 200 per month to include British Gas Protection – Buildings Insurance - Annual Free-holders lease Fee.

4) The property lease period has recently fallen below 80 years and the estimated cost to increase to 99 years is 7,500 plus the free-holders legal fees. (Lease will require renewal in order to sell the property in the future to avoid delays)

5) Repairs / maintenance have been minimal to date, but the property ideally requires a fresh coat of paint and general maintenance to ensure ongoing quick lettings etc. Estimate approx 2,000. The property is furnished and may require a new sofa within the next 6-months and washing machine which is part of this estimation.

6) Last year I managed to secure a mortgage payment holiday and presently pay only the monthly interest on my mortgage loan every month. Loan 1 = 160 (Interest Paid Monthly) Loan = 90 (Interest + Repayment Paid Monthly) Total 250 per month. The payment holiday will end in two months time requiring me to pay approx 580 a month plus the 200 in fees etc. Total 780 – 800 GBP. In short nothing left for repairs.

7) I now live abroad and I am self-employed with very limited funds. My employment situation is through default due to limited job opportunities. My earnings last year were equivalent to 12,000 GBP plus money I transferred from the property rental and overdraft approx 5,000 GBP. I think this year is looking better!

8) I have an overdraft with a UK bank, which has recently changed the fee basis to one pound a day for the approx 1,800 GBP currently overdrawn.

9) I have a credit card debt where I now live equivalent to 3,800 GBP currently charging APR 8%. I am managing to pay the monthly minimum payment fee to avoid the hike in interest of anything upward of 18% if you miss a single payment.

10) I realize the London selling market is currently in a weak position especially for a property with a lease below 80 years and I want to make steps to secure my property as an ongoing rental for now with a view for 1-2 years. To do this I need to change my mortgage to interest only and I would like to establish options to achieve the following points a-e through refinancing.

a) Replace all existing loans, Mortgage Loan / Home Improvement Loan/ Overdrafts / Credit Card and replace with a single mortgage.

b) Ensure mortgage is Landlord legitimate to enable Landlord property insurance. The property is an early 19th Century detached brick house converted into three flats.

c) Explore the cost of additional amount to secure a new 99 year lease – See Point 4

d) Interest only mortgage with the option to reduce the base amount if funds are available.

e) The property will remain my primary home despite not living in the property and no intention to return. I also need to establish CGT requirements if I was to sell at any point in order to consider mortgage duration periods etc. I don’t own any other properties.

Hi there
Firstly, before you do anything, you need to make sure that your lender is aware that you are renting the property. If you rent it out and don't tell them, you are breaching a contract and in theory they can ask to repay the loan. However, in most cases it is possible to resolve it. You don't need to apply for a buy to let mortgage, you may consider asking for a lender's permission to let. It is not a difficult task and providing that your account is in tact, I mean you have maintained your mortgage payments and there is no arrears, they normally don't mind. It does cost anything from £150 to £250 pounds, but some lenders don't even charge it, they just increase your mortgage interest by 1%. Permission normally has a time limit of 1-2 years, after which they may extend it or ask to transfer it to buy to let product. They normally will not allow it if loan to value is above 85%, some have lower LTV requirements. Your mortgage payments have to be covered by rental income, normally expected that your rental will be 125-130% of your mortgage payment.
Insurance is clearly needs to be a proper landlords insurance, as again, they should be aware of the fact that it is rented, as at the time of claim, should one arise, they will not be happy and may refuse to pay. Besides, landlords insurance doesn't cost much more.
Bare in mind that if you will consider to remortgage it, you will need to provide all the personal info, including your income and taking into account that lending criteria has been tightened recently due to credit crunch, you will probably qualify for something like £36,000 altogether. Also most banks now require you to be present in the UK to remortgage.
If you have any more question, feel free to send me a personal message.

If you decide to remortgage and take a buy to let mortgage, many lenders would expect your income to be at least £18,000-20,000 or even more as you should be able to maintain mortgage payments should your property be vacant.
In any case I would recommend to speak to a professional adviser.