Concerned about broker advice

bigoldhenry

I am worried about the quality of the advice that has been given to me and my partner by an IFA and would appreciate some feedback.

The situation is that we both have houses and wish to move in together. My property does not have a mortgage although my partners does and we came up with an idea that in order to make the move it may be beneficial to raise mortgages on both properties as buy to lets. I could therefore raise over 50% of the purchase price on the new joint property. The shortfall to be covered by a mortgage based on my partners income alone, I have been self employed for the last 5 years earning minimal income as I have been the the full time carer for my children.

The overall intention has been to have 2 investment properties that will end up paying for themselves, our joint home would be just that and we would pay 50:50 on the mortgage. We therefore went to see my partners IFA who agreed that this was in principal a good idea and on this basis we found a suitable property.

While looking I started to get concerned at the level of income that my property would achieve. Combined with the fact that I was moving to my partners area (which makes sense for my work) my property was going to be a reasonable distance away and might be difficult to manage.

In order to take matters forward we then returned to the IFA to get the finance sorted out I voiced my concerns by stating that I thought it might make more sense just to sell my property. This received a response along the lines of in that case then we should just forget everything and we should sell my property before troubling the IFA any further. We did not get to discuss my concerns in detail and I felt rather humiliated. I should point out that I have a maths degree so I can handle numbers ok and that I used to work for the debt recovery department of a bank dealing with mortgages (I also had my professional banking qualifications).

It was suggested that my property would raise a buy to let interest only mortgage. When I actually had the chance to look at the figures, given verbally which I had to write down, I became worried on the following:

1. The buy to let deal being proposed for my current property is interest only at 75% of the valuation. This would of course never repay the mortgage which seems self defeating in a market that is falling.
2. The rate of return for the rental of my property is about 4% as opposed to the 5.25 - 5.5% that is possible for my partners property due to the location and size of the relative properties. That alone says to me that rental of my property is not such an attractive proposition as that is approximately a third better return going from the lower to the higher - that is massive.
3. The maintenance on my property would in all likelihood completely exceed any profit once the interest and insurance has been paid so it would actually cost us money.

When looking at the situation with my partners property it was suggested that rather than redeem the mortgage it would be converted to interest only (once again it would never get repaid) on the current mortgage by giving the mortgagee a reason that a change of circumstances occasioned this. The fixed term is up for renewal next year and it was suggested at that point we would look to a formal conversion to a buy to let. This causes me concern in that the story being told is a fabrication and that there is likely a clause in the current mortgage prohibiting letting the property. Whilst it is highly likely that the mortgagee would never find out that is not really the point.

On the discussion of the new property I was asked if I would be a party to the mortgage. This stunned me since it implied that I would not be a registered owner of the property. Given that I am providing over half of the purchase price then too damn right I would be and I should be protecting my investment with some form of agreement to boot. As for the mortgage we had agreed that I would be paying half of it so on that basis I would be contributing something in the order of 75% in total.

We were not given any indication of the type of mortgage being suggested, certainly we were not given any written illustration and we were not given any alternatives or options. The only thing that we were told was that we could overpay by up to 10% of standard repayments per year.

Overall I have been left feeling that we are being railroaded into mortgages that may not suit our needs primarily to achieve the fees of the IFA. I also suspect that the suggestions regarding my partners current mortgage may well be malpractice.

dimbo61

Having cold feet about the whole idea ?
Becoming a "but to let " landlord is a big decision and ending up with 3 mortgages on 3 properties is in the current climate alot to take on.
Do the figures add up ? will both properties rent out and cover the mortgage plus 25% profit ?
Are you prepared to become a landlord and manage both BTL properties or will you be using agents?

bigoldhenry

Cold feet.... no, not the principal of the thing just the figures and more importantly the advice - or lack of it from the IFA

In relation to the figures, that is the nub of the problem. It works for my partners property but as far as I can see not for mine. That is a rather fundamental element that I think the IFA should have examined.

GMS

A buy to let property will usually require the rental income to be 125% of the mortgage payment. If the rent ws insufficient the mortgage could not proceed, or would need to be reduced sufficiently to make the calculation work. Usually these figures would be based on an interest only mortgage. If you prefer a repayment you may end up having to fund a shortfall on the rental yourself.

If that were to be the case the difference would be taken as a credit commitment for your new residential mortgage which could then affect your ability to finance the purchase. As long as a Buy to Let mortgage is considered to be self funding with rental income then it will be ignored as a commitment for a new residential application. Rental income would be determined by the lender's surveyor who would value the property and provide the rental figure for the lender to work from.

The other property is seemingly on a residential mortgage. The lender may grant 'consent to let' but this is at their discretion. To rent out and not tell them is a silly move and should in no way be suggested by a professional adviser. If the lender were to become aware they could call in the mortgage as it is a breach of terms and conditions. Insurance would need to be on a Buy to Let basis for which the lender (as an interested party) could be informed. A risky strategy to rent without permission.

Without knowing your circumstances it is impossible to say how you could proceed. If you choose to sell the property as suggested you need to keep in mind the time involved which will delay your purchase. This may well be why the IFA lost interest as there would be no money in it for a while. Your sceanrio is a 'Let to Buy' and is a fairly straightforward process in the hands of a decent broker.

If you are unsure whether to sell or rent the property you could look to try renting initially (subject to figures) and aim for a mortgage which will allow redemption without penalties should you sell within the early part of the mortgage. Usually a tenant would want at least a 6 month tenancy agreement so you would have this period to guage the situation.

If you are unhappy with the adviser simply walk away. Hopefully you have not paid out any money so far.

Gorgeous_George

Don't let being a maths teacher (edit: or having a degree) lead you into a false sense of superiority. There are a couple of former maths teachers in Ashford that would embarrass you.

Are you paying for the IFAs time or is he on commission only? If you are paying by the hour I am surprised that he would be so short with you. If he is on commission, he may wish to minimise the time spent as his income from the deal is fixed.

Your concerns about the BTL are valid. I wouldn't even consider a BTL for a 4% return. Even 5.5% wouldn't get me interested. There are financial costs - such as repairs, maintenance, letting agent fees, legal fees, voids, tax - and emotional costs such as tenants being late witht the rent, tenants not looking after the property or upsetting your former neighbours. There will be voids (periods when the property is empty but the bills still need paying).

Interest only mortgages are ideal for BTL. The interest is an alloable expense when it comes to paying tax. Not that I would worry about that too much as you are unlikely to make a penny for at least 10 years.

I'd sell both houses, rent for a year and buy when we see the impact that the ConDems 'slash and burn' and 'economic cleansing' policies have on the housing market.

Good luck with whatever you decide. Remember, the IFA has bills to pay too.

GG

TrickyDicky101

Gorgeous_George wrote: »

Don't let being a maths teacher lead you into a false sense of superiority. There are a couple of former maths teachers in Ashford that would embarrass you.

OP says (s)he has a maths degree, not that (s)he was a maths teacher

I agree with your point re maths teachers not necessarily being maths smart though.

I also agree with GG that I wouldn't be looking at a BTL mortgage if your return is 4% - that's rubbish. I would also reiterate how is the IFA getting paid - is it via fees or commission?

Trollfever

The rate of return for the rental of my property is about 4% as opposed to the 5.25 - 5.5% that is possible for my partners property due to the location and size of the relative properties.

Professional property investors are looking for yields of around 9% - 10%.

jimjames

bigoldhenry wrote: »

I am worried about the quality of the advice that has been given to me and my partner by an IFA and would appreciate some feedback.

This causes me concern in that the story being told is a fabrication and that there is likely a clause in the current mortgage prohibiting letting the property. Whilst it is highly likely that the mortgagee would never find out that is not really the point.

We were not given any indication of the type of mortgage being suggested, certainly we were not given any written illustration and we were not given any alternatives or options. The only thing that we were told was that we could overpay by up to 10% of standard repayments per year.

Overall I have been left feeling that we are being railroaded into mortgages that may not suit our needs primarily to achieve the fees of the IFA. I also suspect that the suggestions regarding my partners current mortgage may well be malpractice.

If the adviser is recommending that you give false information to your mortgage company I would walk away. You should be given written information on the deals proposed. Your concern about the validity of your BTL deal sounds very valid and rightly cautious. The query about your name being on the new property.

Any one of these items would give me cause for concern. The fact that so many worrying items are being included in one transaction would make me think very hard whether I could rely on anything else this person was telling me to be valid. It does sound like the commission may be driving the advice.

Andy

Gorgeous_George

Trollfever wrote: »

Professional property investors are looking for yields of around 9% - 10%.

How do you know that? Is there a source?

Take a return of 4% today and with inflation, rent will probably rise by at least 25% in 10 years (the rent that I charge has risen 45% in 9 years). You now have a 5% return.

Property investors are not the same as landlords.

GG

antrobus

I would make one point as far as you current house is concerned. As I understand it, Plan A was to raise a mortgage on this property, use the money to help fund the purchase of another house, and then rent out your current house. As a strict matter of tax law, the interest on this mortgage would not be an allowable expense against the rental income arising on your current home. This might have an effect on the calculations.

As a general rule, the minute you become unhappy with the advice given by any professional advisor, it is time to walk away and find another one.