Morgage for buy to sell?

ljw_3

I have an investment opportunity to buy a house at £40k which is expected to fetch approx £58k when it comes back to market after an upgrade - needs a kitchen, bathroom, central heating and decoration.

As well as the purchase price, the upgrade work has been estimated as £8k so I need in the region of £50k to purchase, upgrade and sell on and leave me a worthwhile profit.

I will only need the loan for a short period of 3 or 4 months (with a bit of luck!), so I was initially looking for a cheap mortage with little or no up front administration fees and no escape fee as it will be repaid in full once the house is sold on.

An IFA recommended a Bank of Scotland "personal choice tracker" but to achieve the £50k I would need to secure this against my own home and I'm not prepared to do that, plus there was a setup fee of £500. I have also seen a Northern Rock morgage which will give me 125% but they want nearly £1000k in set up/misc fees.

Whats the best way to finance this? All replies gratefully accepted!!

dunstonh

If you want a secured loan then you are going to have to secure it against something. 50k borrowing into a 40k property doesnt go, so securing against your own house is the best option. Its a lot cheaper than going for a 125% mortgage.

ljw_3

Thanks for the quick reply.

It may be possible to finance the upgrade work myself so I'm still looking for advice on how best to finance the purhcase over a short term of 3 or 4 months.

PoorDave

If you're not prepared to secure the loan against your home, why would a lender be prepared to lend more than the current value of the asset? OK, so you plan to do 8k of work to make it worth 18k more, but what if you don't, for whatever reason?

Maybe a consortium of MSE'ers would lend you the moeny at a reasonable rate...

Also, wouldn't you only need 48k (40 + 8)? Do you have the costs of the work in writing, and is the final value the price ceiling for this type of property, assuming 100% perfect, or a bit under that to give you some breathing room?

These are the things i'd want to see if i want about to finance such a project.

dwight-van-man

Two points - fair enough, the work is costed at 8k but you've also got to factor in mortgage costs, buying and selling costs, contingency for the unexpected work that always crops up, not to mention the cost of your own time. Would CGT be an issue for disposal of a secondary residence? Looks like a bit of a tight mprofit margin.
Second point - on the assumption that you already have a mortgage on your main property, Northern Rock won't lend to you as this property will not be your principal residence. If you are mortgage free and this property is a departure from your current circumstances, ie, you have a partner and kids and live in a 100k house, NR would be asking questions as to why you were buying this property. If the underwriters feel that you are using the mortgage as development finance, there is a good chance they will decline your application. Other lenders may take a similar stance. Might be worth considering a BTL with no erc...

ljw_3

Thanks for all the input so far - never expected it to get so complicated so quickly, I'm new to this as you can probably tell!

Anyway, a survey confirmed that currently the property would be worth £40k and that if it was brought up to a reasonable standard it should be worth approx £56k. I have checked local prices for similar properties and £56k (or slightly more as the market is growing here) does appear to be achievable. Whilst I would love to make a vast profit, it is my first time developing and I'm really only expecting to make a modest profit, offsetting some possible gains against the mistakes I'm bound to make.

The upgrade costs were calculated as a 'top end' cost by someone with years in the building trade and takes into account buying/selling costs, possible morgage payments etc. We may even form a commercial partnership if this (the first one) goes ok. I also factored in a further £2k slippage hence the buy at £40k, spend £8k but may seek £50k.

I haven't a morgage on my main property - hence the reluctance to secure anything against it. CGT may well be an issue, if not this time then on the next property, that's why I'm considering a longer term buisness arrangement (possibly a partnership?) with my builder friend. CGT does concern me but I haven't looked closely at this yet!!

Are they any other elements to consider?

silvercar

quick "buy to sell" CGT formula for you:

Selling price - buying price - costs (including estate agent fees) - improvement costs (but not repair / maintenance) = liability for CGT.

Take off that 8,800 CGT allowance per person per tax year and your taxed at 10%/20%/40% depending on your tax position on the balance.

56k-40k-2k-8k=6k to be taxed.

PoorDave

Mortgage over 4 months (say) is likely to be around £1000. EA fees minimum 1%, so minimum £400ish, but maybe they have a minimum fee that over-rides that.

Solicitors might cost £500 at purchase, £500 at sale.

So we up to £2.5k ish already, minimum.

If the builder is your friend (no offence intended to either of you!) you may find you get cheaper prices, but come lower down his list of priorities because of this, so things take longer, and the mortgage still has to be paid.

I don't consider myslef a doom-monger; more a realist who has looked into this kind of thing before and never done gone ahead with one!

6k before tax would be nice to have, but after the tax man's slice there isn't much left to cover things going horribly wrong. Even if you're only paying basic rate tax you've lost over 1k out of that 6k.