Remortgage for property investment

basher

My parents are remortgaging their house to buy a cheap property in their neighbourhood. They will refurbish the place and hope to sell it in 6-months time. To reduce costs they are just going to remortgage their own house and then settle the balance when the sale completes.

I have found a good deal for them from the Coventry BS with 4.99% var and some incentives (cheap legal fees and a free val.). There doesn't appear to be penalties for early repayment (even after 6 months).

Does anyone have advice on this process or can advise of possible pitfalls?

Many Thanks

frugal_dougal_3

There are many pitfalls to doing a project such as this on borrowed money which might mean that they do not make a profit and could even suffer a loss.
It relies on them being able to do most of the work themselves without using sub-contractors and also being able to get a quick sale at the end of the project and end the loan payments.
The longer a finished project sits on the market (which is currently very slow) the more it is going to cost them in loan repayments and utilities ie electricity, gas, water etc still have to have standing charges paid for. There is also the community charge which is only waived for the first six months that a property is unoccupied.

When doing all these calculations take into account the very worst possible scenario's and then put in a contingency fund as an "insurance policy".

If your parents are considering doing all the work themselves and would ordinarily have other jobs they would have to take their wages into account in the expenses as well.

I hope this helps. It seems like doom and gloom but there are so many eventualities that people don't consider when undertaking this kind of project.

basher

Thanks for your reply.

My father is a self employed gas fitter and is intending to take a month out from his normal work to refurb the property. He has a fare grasp of durations for some tasks but I'm sure he'll still be optimistic.

The community charge was an interesting point - something I know is absent from his budget (and I was unaware of the 6-month 'free' period).

I worry most about the tax burden and how it will eat into their profits. Any ideas on what he may be expected to pay?

frugal_dougal_3

Regarding the Community Charge you would need to check this with your local authority as they often differ in what they will allow.

Your father sounds as though he could enhance a property by installing central heating etc. Obviously I don't know how much their intended property needs doing to it but any major changes will also need local authority planning/building regs for which a fee is also payable on a scaling charge. (Again check this out).

I am not a tax expert but I think that you can make about £7,500 or thereabouts per year in profit before you have to pay it. Again check this with another member on this site as my figure is not accurate.