2 mortgages, which one should I pay off?

Loft_monster

Hello,

I've got an interesting question. I currently owe approx £100,000 on my mortgage of the flat I live in. But the wife and I are looking to move into a house in a different area and let out this flat.

Now then, my mum has agreed to lend me £100,000 to pay off my mortgage on the condition that I pay her back when I sell the flat, which I'm planning to do once the house prices are back up.

My concern is the tax implications? So I have a few options.

1. I pay off the mortgage of my flat and collect rent for a few years, then sell it and give my mum back her £100,000 (plus a bit extra)

2. I change the flat mortgage to a Buy-to-let and pay £100,000 towards the deposit (+£35,000 my own cash) towards the new house, which will probably cost around £200,000.

3. My mum buys the flat off me, I collect the rent then or she collects the rent? Then when she sells it she takes her £100,000 and gives the rest to me.

Another thing to consider is I've just been made redundant but my wife has a secure full time job.

Any help or pointers in the right direction to get some advice wuold be very much appreciated.

Thanks very much in advance.

Loft_monster

Anyone? any ideas? please.

jayphe

That's quite a tough question you're asking, it might need a couple more questions answering before anyone can give you a good answer...

Loft_monster wrote: »

1. I pay off the mortgage of my flat and collect rent for a few years, then sell it and give my mum back her £100,000 (plus a bit extra)

This doesn't give you any extra cash to use as a deposit to buy a house in your new area, so you'd have to check if your £35,000 savings would be enough to get a mortgage on the income from your partner?

You may find a mortgage provider who is willing to take the rental income into account as well.

2. I change the flat mortgage to a Buy-to-let and pay £100,000 towards the deposit (+£35,000 my own cash) towards the new house, which will probably cost around £200,000.

There are 2 things to check on this one. Do you have enough equity to get a buy-to-let mortgage for the £100,000? If you can't, you could always divert some of the money from the new purchase to secure the BTL deal. When you've worked out how much you have available as a deposit, can you get a mortgage for the new area?

On the face of it, if your partner's income is within a sensible mutiple, things should be OK with that huge deposit. The tax benefit of this deal is that you can (currently) offset the BTL interest costs against the rental income, so will pay less income tax.

3. My mum buys the flat off me, I collect the rent then or she collects the rent? Then when she sells it she takes her £100,000 and gives the rest to me.

Your mum would have to pay something close to current market value to you, or the tax people might take an interest. You'll also need to read up or get advice on capital gains tax, as there used to be an advantage if you had lived in the place as your sole residence, your mum would not have this advantage when it came to selling time in a few years.

This option will also put you in the same situation as the 1st whereby you have to secure the new mortgage with your savings only. I can't do the exact figures as I'm not sure what the flat is valued at, but assuming £150,000 and ignoring buying and selling costs. Your mum pays £150,000 for the flat, you get £150,000, you pay off your mortgage of £100,000 and give £50,000 back to your mum, so her total outlay is £100,000.

If your mum doesn't want interest paying on the loan, she can then collect the rent and hand it over to you. You might be able to use this income toward the new mortgage, but it will be quite tough to get included with no formal arrangement or historical precedent.

Another thing to consider is I've just been made redundant but my wife has a secure full time job.

Any help or pointers in the right direction to get some advice wuold be very much appreciated.

Thanks very much in advance.

It's also worth considering that as you've just been made redundant you could reduce the risk a little by either renting in your new area, or just selling up the current flat before buying in the new area, maybe using your mum's funds to help.

Loft_monster

Many thanks for answering my question...

So perhaps the best bet would be for my mum to pay off my mortgage on the current flat I own, by basically giving the money to me and me paying the building society, but will I incur any taxes at the time or further down the line when I sell the flat?

Many thanks again.

Jacka87

If you sell the flat now (as your main residency) then you will avoid capital gains tax. If however you move into a new home then in say 6months you sell the flat you would pay capital gains tax.

If you sold the flat to your mum now, then she sold it in 6 months, then she would pay capital gains tax.

Legally if you are trying to avoid capital gains tax then I suggest that you sell now before moving.

However, just a point to note, if you bought the property a couple of years ago, and it has since dropped in value due to credit crunch etc then you would not pay capital gains as its not gained you any money? This involves comparing the price you bought it for against the price you plan on selling it for.

Finally, now this is not my suggestion just something I have heard of before. If you moved into your new home then in lts say a yrs time you decide to sell the flat as the property prices have increased, then by moving back into the flat before you sell you could avoid capital gains on the flat, at which point you would then just move to your house. The tax man would not like this and you would need to prove that you actually did move and it was not just a way of avoiding tax however I have heard of peple doing similar things in the past.

Similar to above If you own the flat & since you are redundent maybe its best to buy the house in your wifes name. That way she could own one and you own one. In a yr or so time you sell the flat and state its your sole resideny then you avoid capital gains. At which point you could then use the flat sale to buy into the mortgage with your wife (effectivly you will pay this back to your mum-think of it as then buying your mums share of the new house as thats what she invested in)

Loft_monster

Thanks so much for your helpful reply Jacka.

The last point is very interesting, because I pretty much assumed we would buy the new home in my wife's name. So my mum would still pay-off my mortgage and I could still rent out the flat for a year or two or however long. I could take the rent, give it to my mum.

So, say I sold the flat in a couple of years for £20 grand more than I paid for it and then gave the cash back to my mum the taxman would be fine with this? Surely they would realise that I have been renting it out and not living in it?

Thanks again.