Our son is at university and is renting a three-bed flat with two of his friends.
They are each paying £415 per month in rent with utilities and other bills on top of that.
There is a flat next door that has come on the market that we would like to buy.
We hope to buy this for just under £150,000. I have just inherited £54,000 and my wife has £160,000 in investment trusts which have been doing exceptionally well.
We have rental income of £6,000 gross from another property. Our own home is mortgage-free with a value of around £300,000. Next year we have two endowments maturing for approximately £40,000.
We want to buy a flat for our son at university and then rent it out when he graduates
To fund the flat for my son to move into we would ideally take £50,000 from the investment trusts and had hoped to take a five-year interest-only mortgage on the balance.
Virgin Money will only do interest-only if we have earnings in excess of £50,000 a year which I don’t.
Santander will not allow us to use the endowments as they do not mature in line with when the mortgage expires and they will not allow us to remortgage our own home as we intend to rent out the flat when my son finishes uni in two years.
He has a friend who will be sharing the flat we propose to buy and will be paying us a token rent.
Should we just use all the money from the investment trust or are there other mortgage providers that will offer us an interest-only mortgage for five years?
Shaun Church, of mortgage broker Private Finance, replies: As you have a number of assets, there are several options available to you to assist in the purchase of an additional property.
You mention that you have £160,000 in investment trusts that are performing well.
In contrast, given the current low interest rate environment, you are unlikely to see much return on your cash inheritance if deposited into a savings account.
It is therefore worth considering using your inheritance fund for a deposit rather than drawing on investments that have better prospects for long-term growth.
Assuming you meet basic lending criteria, there will be a regional building society willing to offer a mortgage on a five-year interest-only basis, noting that some lenders such as Leeds Building Society do not require minimum levels of income.
If this is a consideration, they are also more willing to lend to older borrowers.
However, it’s worth bearing in mind that typically, less-mainstream lenders are likely to charge higher interest rates.
A short-term fix might be a better option
You mention that you intend to let the flat out after two years once your son has finished university.
If you do this, you will need to refinance to a buy-to-let mortgage, as a residential mortgage should not be used against an investment property.
It may therefore make more sense to arrange a mortgage on a two-year fixed basis and then remortgage to a buy-to-let loan once you start letting out the property.
If you were to arrange a loan on a five-year basis only to refinance within two years you may face additional fees.
Similarly, not telling your provider that the house is being let out would be a breach of contract and could leave you open to significant charges.
Alternatively, given you already own a home mortgage-free, it would also be possible to take out a loan of £100,000 against your existing residential property, using other assets (such as your investment trusts, equity in your buy-to-let property or downsizing your main residence) as a repayment vehicle.
A mainstream lender such as Santander would certainly be willing to arrange such a loan assuming you have sustainable income and meet their parameters.
You also have the existing buy-to-let property that provides an income. You could extract equity from this property by taking out a mortgage against it, although the cost of repaying the mortgage would eat into your monthly rental income.
Given the myriad of options available to you, we’d suggest that you seek independent financial advice, both from a mortgage broker and financial adviser who will be best positioned to examine your whole portfolio and advise on the benefits or disadvantages of using your investment trusts, for example.
A mortgage broker will take a whole-of-market approach and can recommend the best product for your specific circumstances, looking beyond just the headline rate.
This also prevents a black mark appearing on your financial record by applying for loans direct with lenders and then being rejected.