First Time Buyer: Seond Charge

Jack_Maloney

Hi,

I need some advice as I feel like I am getting myself into something which is very complicated and im not entirely sure how above board it is.

An outline of my problem:

• Me and my gf have found a really nice property. Estate Agent had it on the market for 150k but we met the property developer and he said because we are first time buyers (less complications with a chain falling through etc and he wants a quick sale) and we were buying off plan we could have it for 135k.
• He offered a few good incentives like free maintainence charge for a year, input into how place is designed and £1000 cash to spend on furniture etc.

This is where it gets complicated:

• I only have a 10% deposit. Because its classed as a new build (its an old pub converted into flats) the mortgage companies will only give a 20% deposit. The property developer has offered to stump up the shortfall in deposit. However, to do this he is inflating the price of the home to say £146k to cover his deposit that he lends us.
• Legally he's only allowed to lend us 5% as a builders deposit incentive. The other remaining 5% he is lending out of his pocket as an interest free loan.
• To further complicate things the mortgage company have lowered the amount they are prepared to give me due to the fact I have a student loan meaning I only have enough for a 130k property so the property developer has offered the extra 5k. (To meet the 135k valuation) To cover his back he will put a second charge on the property so we pay him back when we move on.

If anyone out there still follows me please could you offer your opinion on this. Should I just get out before I get in too deep? Is the property developer allowed to just give me cash? And are the mortgage company going to be ok with a second charge being put on the property? Or does this deal seem fine to you and id be mad to turn it down (The fact he's offering some of the deposit means we will be paying lower interest rates, we will be getting a cheap brand new home etc)

Please let me know what you think!!!

Thanks,
Jack

kayla3600

When we purchased our property we had a second charge loan put onto ours. Apparently the two mortgage providers that are ok with it are Nationwide and Halifax.
The 5% incentive shouldnt up the price, if the deal is 135k then thats what you should pay. I wouldnt be happy with the 5% out of his pocket uping the value. And what if he decides he wants the money back? Would you be able to find £6750? Or even £7300 if he's inflating the price.
I know some people on here are very wary of shared equity, but we have never had a problem. Probably due to the fact that the valuation came in £22000 under the asking price.
But in 10yrs (or however long the loan is for) you still havent moved or paid off the loan what will you do?
If your planning on moving in the next couple of years then i wouldnt risk it as house prices could still drop further and you could risk being in negative equity.... We're sticking ours out for five years, seeing as buy that time even it it sells for the same we purchased it for we would still come out with something. (repayment mortgage on a low rate with overpayments)
Sorry if I have rambled but I was just trying to think of everything that was said to me when I purchased mine

Jack_Maloney

Thanks for the reply. Baically he's upping the value of the house to cover the money that he'll give us as the deposit. So if he puts 15k towards deposit he'll up the value of the home by 15k and give it to us as cash so we still effectively pay the same amount. Although we'd be paying more for the house, that 15k would be ours. He reckons the property will have no problem at being valued at the inflated figure (since he was already giving us the discount). The only money we would need to pay back is the money that he lent us to make up the shortfall in mortgage money (5k I believe).

Well my mortgage in prinicple is with Halifax so hopefully they are still ok with second charges. He is putting a 10 year clause in the contract so if we havent moved in 10 years then we have to pay him back (but to be fair I dont plan on being there for over 10 years because its only a 1 bedroom and I plan on starting a family at some point!!) Legally, I believe, he cant ask for the money back until we sell the property.

If anyone else has advice please feel free to contribute!

kayla3600

If he is giving you 15k cash Halifax are more then likely going to want to see where that came from, and may not like what they find. The developer giving you 15k may not go down well. But if you are going to go down this route make sure you get everything in writing and that the 15k is a gift, and does not need to be paid back. In the contract regarding the 5k make sure it is clear what you will be paying back in 10yrs/when you move. Our second charge value will be in relation the what the house price is at the time that we sell. So could go up, could go down.

poppysarah

Off plan?

You'd want to be sure it's going to get finished.

Have you looked around at everything else in the same budget?

silvercar

I see no problem with the vendor gifted deposit - though it only works if the Halifax valuer agrees with the high valuation of the property. Lets be honest here, if someone was prepared to pay more for the property they would have been the buyers not you!

Second charge on the property shouldn't bother the Halifax as they have priority if they needed to repossess and though they may have an opinion on you taking out another debt when you are taking out a mortgage with them, in practice a day after completion with them you could have numerous charges sitting 2nd, 3rd, 4th on the property if you wished.

Jack_Maloney

I did ask the developer why he doesnt just wait until someone with more money comes along and he said because he wants it to go to a first time buyer so he can quickly move onto another project.

This gets even complicated, I have just rang Halifax and they said they accept the builders incentive but they wouldnt accept a second charge. Are they allowed to refuse this or are they just saying this to put me off the idea?

And im sure the property will be finished. He's converted 70 properties in the local area in the last year and he's taken me to a few of them to show how nice he does them up. So im not worried in that respect. We wouldnt be putting the deposit down anyway until the property was near completion as it cant be valued until then.

CloudCuckooLand

Giving you a 5% "bung" to help the deal along, and then another £5k "under the table" to meet a valuation is highly unorthodox.

If its only worth £130k, its only worth £130k...having that £5k to pay off at some future date, is just putting you closer to negative equity from day one...

Pretending to knock £10k off and then have to put it back on in order to "gift" it to you again, is just sleight of hand.

If a buyer with more deposit comes along and buys next door, they will get it for £135k, that will eventually appear on Land Registry figures and when you try to sell you will always be having to compete with that sale price...

I understand the deposit difficulty, and its tempting to take gifted deposits, but they are false discounts. Go find a re-sale flat, get a mortgage with your 10% deposit, and pay a real price, not an artificially inflated one.

(Halifax can refuse the second charge - they are right to, as they recognise the dodgyness of the whole scam.)

Expect it to be valued around £120k, when its finished...

Rockporkchop

He isn't offering you a good deal so I wouldn't continue with it. Why don't you just keep saving up like mad and revisit the flats again when they are finished, with a view to paying no more than £125k (but realistically much less than this). I'm sure they will still be available.

Also, I would be extremely wary of buying a one bedroom flat if you are thinking of starting a family in the future as you might find you will be stuck with it for many years to come. It used to be easy to move on every few years but things are really different now. To be honest, even if it's just the two of you, you will probably start to feel stifled in a one bed before too long.

poppysarah

CloudCuckooLand wrote: »

Expect it to be valued around £120k, when its finished...

And will you be able to get a mortgage when it's complete?

Very risk off plan at the moment.

silvercar

Be aware that you will spend out money on legals, valuations, mortgage application etc and then risk the property not being valued at enough to make the deal happen.

Halifax's refusal of a second charge is reasnable - they want you to be able to repay the mortgage. SO they could instruct your solicitor (who also acts for them) that the mortgage is only to be released on condition there is no second charge. This would apply initially. Down the line people take secured loans for all sorts of things which are then registered as second charges on the property. You would have to see how the builder feels about not being able to register a charge.