Peter and his friend Sally bought a flat in November 2006. They have a £170,000 repayment mortgage with Cheltenham & Gloucester fixed for two years with an interest rate of 4.79 per cent. Peter lives in the property but Sally only invested money in it and lives with her boyfriend elsewhere. Peter has been offered a job abroad for a year and is keen to go. Would they be better off selling up or converting to a buy-to-let mortgage and letting the property while Peter is away?

Richard Perry, of Savills Private Finance, says: Peter and Sally sensibly chose a repayment mortgage when they bought their property. This means that the amount that they owe reduces over the years so there isn’t a lump to repay at the end of the term. Peter has an opportunity to work abroad, creating a scenario which is becoming quite common.

Many people are choosing to rent out their home rather than sell it, because property is such a good investment. Switching your home to a buy-to-let enables you to use the rent to pay the mortgage. The idea is that the property pays for itself in the short term while you benefit from capital growth in the longer run.

Peter and Sally are correct in assuming that they can switch their existing loan to a buy-to-let and that they should sell up as an absolute last resort. As they bought the property fairly recently, the disadvantage of selling now is that it may not have appreciated enough to cover the significant

buying costs, including stamp duty, solicitor’s fees and mortgage costs. The other disadvantage of selling is that they will have to pay penalties to get out of the mortgage.

Cheltenham & Gloucester (C&G) will allow them to stay on their 4.79 per cent two-year fix, charging them a nominal fee of a few hundred pounds to switch to a buy-to-let. This leaves them with two options while Peter is away: they can switch it as a direct like-for-like and leave it on a repayment contract (at a monthly cost of £973) or they can switch to a buy-to-let contract and change it to interest-only (costing £678 a month).

Their decision will depend on the rental income: if it is enough to cover a repayment deal, it would probably be best to keep the mortgage. But if the rent is less than £973, they may wish to convert it to an interest-only mortgage while Peter is away. The added advantage of this is that the entire mortgage payment can be offset against the rental income when it comes to their tax liability.

The best action would be to stay with C&G until the two-year fixed-rate period ends. If Peter is still abroad, they could remortgage the property on to a buy-to-let deal. Rates are around 5 per cent at the moment, which would cost them £950 to £1,000 a month on a £170,000 mortgage on a fixed-rate basis, assuming that rates stay the same. Savills Private Finance: 0870 9007762

JARGONBUSTER

What is the difference between an ordinary mortgage and a buy-to-let mortgage?

A buy-to-let mortgage is designed for the purpose of financing a property that is to be rented out. Mortgage rates are not the same as in the residential market: lenders consider buy-to-let a greater risk and demand a greater return, so their buy-to-let rates can be up to 1 per cent higher than residential rates. The affordability for a buy-to-let mortgage is normally based on the anticipated rent exceeding the mortgage payment by a certain margin, typically 30 per cent. Most lenders ask for a deposit of at least 20 per cent of the value of the property.

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