Second home mortgage versus Buy to Let

ohwattagosiam

Hello everyone,

I'm seeking some advice regarding the above topic.
A member of the family has been struggling to pay the mortgage on his home, and I have been approached to buy him out. The idea is: that I clear his debt, but he remains in the property as a tenant. The property is worth around £125k, and the money I would need to borrow would be £75k. Having spoken to a couple of people, some seem to be under the impression that I could take the money up as a second home mortgage rather than a Buy To Let . My questions are - Is this true? And, if so which mortgage would go for and why?

Thanks in advance for any info

HappyMJ

Answering your question without debating why the answer is yes you can extend your current mortgage if they will allow it. You can go for any residential mortgage as the second property will have no mortgage. You need to careful regarding tax the exact amount of the advance can be used to offset the rent but....oh theres lots of buts...just be careful.

Pincher

If the family member can keep up the rent, then it's arguably better to get a separate mortgage, so you have a small letting business that has its own income and deductibles.

Assuming £7500 rent per annum, you would have been paying 20% or 40% tax on the full £7,500, as well as paying the mortgage interest.

Let's say you get a 6% fixed mortgage, interest only to keep the income:outgoing ratio constant. The annual interest on £75k is £4,500. You also get 10% of rent (£750) as Wear and Tear Allowance. £4,500 + £750 = £5,250

There are bound to be other maintenance and repair items, but you do not need a letting agent. So, your total deductibles could be £6,500. Thus, your taxable income from this rental activity is only £1,000 = £7,500 - £6,500.

Assuming you pay 40% tax:

No tax relief, you pay £3,000 in tax = 40% of £7,500

With tax relief, you pay £400 in tax = 40% of £1,000

That's EVERY YEAR.

VIGILANT22

Be very careful, this falls into the category of Sale and Rent Back ..you need expert advice on this.....

ohwattagosiam

Thanks for that Pincher. Essentially, like a lot of people over the past year, his work has dried up. He would be claiming Housing Benefit, which would be around 125%-130% of the mortgage.

HappyMJ wrote: »

Answering your question without debating why the answer is yes you can extend your current mortgage if they will allow it. You can go for any residential mortgage as the second property will have no mortgage. You need to careful regarding tax the exact amount of the advance can be used to offset the rent but....oh theres lots of buts...just be careful.

It didn't sound like it would be extending the mortgage on my home. More like, taking out a second residential mortgage on his house. Sounds a bit dodge to me, but I've yet to read up on it which is why I thought I would ask here first. There are always some kind of ambigious loopholes :question:

VIGILANT22 wrote: »

Be very careful, this falls into the category of Sale and Rent Back ..you need expert advice on this.....

A catagory that probably is exactly what it says, however, if you could ellaborate a little I would appreciate it.

VIGILANT22

[QUOTE=ohwattagosiam;


A catagory (category) that probably is exactly what it says, however, if you could ellaborate a little I would appreciate it.[/QUOTE]

It is a category/term used in the industry!

Many lenders will not lend on Sale and Rent Back...known as SRB Schemes....as I said you will require expert advice.......

janz70

are you paying the full market value for the house or is he selling it to you "on the cheap"

PasturesNew

It is possible that the benefits people will view the transaction as a Contrived Tenancy and not pay him a bean as it looks like a scheme for him to get the taxpayer to pay his mortgage.

So be aware of that and research: Contrived Tenancy.

Pincher

There used to be some sort of help where the Housing Benefit pays your mortgage, kicks in after nine months of unemployment, which is why mortgage protection insurance covered nine to twelve months only. The idea is if you lose your home, then the Housing Benefit has to pay your rent any way, so they might as well help with the mortgage.

If it works, as opposed to red tape galore, sounds a lot simpler than getting another mortgage. Haven't looked at it for ten years, when I was last on the dole.

VIGILANT22

PasturesNew wrote: »

It is possible that the benefits people will view the transaction as a Contrived Tenancy and not pay him a bean as it looks like a scheme for him to get the taxpayer to pay his mortgage.

So be aware of that and research: Contrived Tenancy.

As far as lenders and the FSA are concerned this falls under SRB/SALE and RENT BACK.....Neither are "happy" about these transactions....Unless people take advice they're unaware of these schemes.
People think if family are in difficulties the easy answer is to buy cheap and rent back, they have no idea this falls under Sale and Rent Back and going by the posts on here this is certainly true.
Believe it or not lenders are not "daft". You can't buy a property as a 2nd property or BTL at a hugely discounted price and not declare this...even a "simple" underwriter will identify this by simply looking at the figures.
You can't massage the truth and not declare this is a SRB unless you want to commit mortgage fraud.
But some people think they know better and try to get away with it...
You will always find people who will push boundaries. (advisors/clients)
If mortgage fraud is committed not only will the advisor be struck off but in these cases the loan will be recalled and a family left homeless.

Even for a purchase that is not SRB, if the valuation is 150k and you buy at 75k, then the mortgage is based on 75k and you still need a deposit. Just because equity is in the house you cannot use this as a deposit except is some rare circumstances........

V_J_Conn

Then the next step is owrk with a helpful whole of market broker who can go through the scenario with you the family memeber and discuss with lenders who maybe able to help
with any mortgage you need the full facts to be gathered and very often a solution comes out of the initial chat
BuyToLet Vivienne