The Gazundering Challenge

GDB2222

Surely, getting the mortgage is only the start of your problems? You are going to be raising an extra £250k in debt, costing roughly £1500 per month to service (interest only). So, allowing for voids, service charges, letting expenses, maintenance, you are going to need to let this flat out for roughly £2,000 per month. I don't know the block, but that seems to be a lot of rent. There will also be other BTL landlords trying to let theirs too.

So, let's say there is a £1,000 per month shortfall, how will you fund that? Unless you can answer that question, is there actually any point in trying to arrange a mortgage?

poppy10_2

ukmarkwilson wrote: »

The walking away from it has crossed our minds - an overall loss of £28k (deposit + mortgage valuation) would be horrible

The average house has lost over £30k in value in the last year alone - your flat being a newbuild flat in London could easily have lost double that.
Getting out for just £28k is a bargain.

macaque_2

ukmarkwilson wrote: »

Thanks Matey.

The walking away from it has crossed our minds - an overall loss of £28k (deposit + mortgage valuation) would be horrible; the bulk of it was from my mum's will. A modest up side is that the £10k savings (the one's now worth £6k) will vest in May at a minimum return of the original investment, so I wouldn't lose £4k as well. My partner has been given an extra £5k lump sum from her employer to be paid in January, so our net loss would be £23k.

Again, not ideal, but the hope is that the property value would increase by, say, £10-15k in 5 years or so (after 18 months, despite market conditions, it has retained its original value), which would be a nice little nest egg for when we start thinking about having children. We're not aiming to make a monthly profit - just charge tennants the interest on the mortgage and the service charge.

I'm going to ring around now and try to play the hard-nosed investor / honest chap / begging peasant cards and see what happens. When I did the site inspection yesterday, the site manager said that all the flats had sold, nobody had trouble completing... and Israel and Palestine had signed a peace accord granting everyone free jelly and ice cream!! I'm going to cold call the developers to see if there are any flats for sale without revealing who I am to probe for the truth!

Your paper losses amount to over £20K and if you go ahead with the purchase, you could add further losses of £50-100k. If the contraction in financial services within London continues, you may struggle to find a tenant at any price let alone to cover your mortgage. There is one further and potentially devastating risk. When a country manages its economy badly, the price people pay is high interest rates. Iceland have recently seen interest rates rise to 18%.

To put it slightly harshly, you seem to be suffering from a total judgement bypass. You have lost money because house prices have fallen. You are struggling to find credit because house prices are still falling. Why not see these signals for what they are and get off the track before the train crushes you.

neverdespairgirl

Where in East London is the flat? How big is it? What is the realistic rent?

Mr_Matey

hi again,
How did your calling around go?

Whilst I agree walking away from £28k would be pretty horrible, what do you think you could realistically sell the place for? I know the surveyors think it is worth £275k still, but what are similar apartments going for? If they're selling for £250k you have already lost £25k.

The point macaque makes about future potential losses is valid, however youl'l have to make your own judgement on where you think prices are heading. Pesonally I don't think you'll see 10-15k profit in 18 months, but each to their own.

I still think it is worth getting a feel for if it is worth walking away from, as you seem undecided. To do that you will also need to factor in the costs of arranging finance.

It sounds to me like walking away could be a very good financial decision that would also remove a lot of stress.

ukmarkwilson

Hi all - bit of an update [and thanks to Mr Matey for the advice];

We're screwed. The builders have made it clear that they will not refund us a penny of our 10% deposit - and may even take us to court to claim any shortfall from the original price if they sell it at a loss. Unfortunately, the solicitors have confirmed that they can do this as it's in the contract.

Our sole remaining option is this - lie. If we take out a residential mortgage (assuming we can find an 85-90% LTV offer) and then hope to rent it out. I think (at a rough estimate) that the mortgage might be £1600 per month so we'd need to rent it out for the same or more.

My big worries are;
a) can we get an 85-90% LTV residential, interest-only mortgage? If the answer is yes, we will save ourselves £27'500 in deposit and any potential penalties, legal fees, etc.
b) is it likely that the lender will find out we are not living there and, if so, what would they be able to do to us? I'm not willing to go to prison for this!

Appreciate all of your help - as always, very sage advice. :beer:

GDB2222

Surely, getting the mortgage is only the start of your problems? You are going to be raising an extra £250k in debt, costing roughly £1500 per month to service (interest only). So, allowing for voids, service charges, letting expenses, maintenance, you are going to need to let this flat out for roughly £2,000 per month. I don't know the block, but that seems to be a lot of rent. There will also be other BTL landlords trying to let theirs too.

So, let's say there is a £1,000 per month shortfall, how will you fund that? Unless you can answer that question, is there actually any point in trying to arrange a mortgage?

You need to answer this question first.

Also, mortgage fraud which you propose will get you into negative equity straight away, which seems completely daft. You are likely to get found out, because this doesn't stand up financially, so at some stage you are going to run out of money, and yes clink is the likely penalty when that happens. This new flat may take 10 or 20 years of inflation before it catches up with the purchase price you have agreed.

Do you and your partner own your flat jointly? Which of you contracted to buy this new one?

ukmarkwilson

Well, that is a tough question - there are so many unknowns (or factors that can only be half-guessed at). If I look online, there are several hundred similar flats for the same price (or higher), which says one of two things; either, yes, there are flats on the market at this price, which suggests that the landlords can get the amount they want or else there wouldn't be so many at that price or, because there are so many available, they aren't being rented out.

I feared that would be the case with mortgage fraud - I just needed at least one other person to validate that fact.

We own our flat jointly but it's my name alone on the deeds for the new place. So, I assume Mrs Wilson can avoid going to Holloway and can still visit me if I get thrown into Brixton - it's only round the corner!

Idonex

poppy10 wrote: »

The average house has lost over £30k in value in the last year alone - your flat being a newbuild flat in London could easily have lost double that.
Getting out for just £28k is a bargain.

That's the 'average' house. Prices in East London have been going down slowly, but really haven't been diving too much with the exception of a few places i've seen, that have had huge price drops from the developer getting into trouble or people absolutely desperate to sell. If the average flat in East London was really over 30k less from last year i would have bought a place myself.

Decent 2 bed new builds in the areas the OP mentions are still 250k - 335k. Whether they sell is another matter i suppose.

Ewarwoowar2

Another problem you will have is that at the moment it is a new flat. As soon as you’ve rented it out for six months it’s a second hand flat. Even when the market was at it’s peak, second hand flat went for 10% - 15% less than new flats in the same block.

With the credit crunch, the current and expected job losses in the city, the flat could easily be worth 50% of its 2007 value by next year. If you missed repayment or the bank found about your fraudulent loan, it could be sold at auction for 50 – 70% of it 2007 value. The bank would then chase you to make up the shortfall. Flats in my area (Manchester city centre) sold for £250k in 2006 are now regularly going for less than £100k at auction.

You sound like you’re heading for disaster and should take some legal and/or financial advice ASAP.