Avoidable ERC?

mondays

Hi

I know there is a thread on ERCs but wondered if anyone has had any success in reducing theirs?

We are moving to Australia and the near £6000 ERC :eek: we have to pay to break our mortgage is not helping my spreadsheets of income/expenses!

I understand we chose to lock in to this mortgage but it would be nice to avoid part of the charge if at all possible. It can't hurt to ask.:)

holly_hobby

If you were completing on another mge within a short space of time generally 3 mths, on occassion the lender will refund part or sometimes all of the ERC if you go onto another product with an ERC.

However with your moving to Oz (and I guess another UK propery pch not on the cards in the immediate future), I can't see a way round it.

Only possible thing I can think of is to see if you could transfer to a penalty free deal with them (obv not mentioning your imminent redemption !), there would still officially be an ERC - but is it worth trying to negotiate a reduced ERC ? (any saving is better than the current 6k). Then redeem as you plan to, with no further ERCs (there may be other lender charges for redeeming, check this out)

Is it worth a chat with your lender about this - they may agree .. they may not ... its a long shot but they can only say no.

Sure others will be along if they can think of a way round this ...

Hope this helps

Holly

catieeb06

You signed the contract, therefore the ERC is payable upon redemption.

Ignore what the above poster has remarked. They're not going to let you transfer to an ERC free mortgage without paying the ERC on your existing mortgage. Fruitless task.

Other options are to A)Pay it. B)Ask your lender for consent to lease your property- might be a small admin cost to do this and keep your property rented out until the ERC either reduces or goes altogether.

somethingcorporate

You're appealing to the kindness of the mortgage lender's heart, unfortunately they won't have one so the answer is going to be a firm "no".

There is absolutely no reason for them to let you avoid the ERC.

The only thing I can think of is considering renting the property out until the ERC is up? £6k is a massive amount of anyone's money and we've rented out to avoid a similarly large ERC.

holly_hobby

catieeb06 wrote: »

Ignore what the above poster has remarked. They're not going to let you transfer to an ERC free mortgage without paying the ERC on your existing mortgage. Fruitless task.

You will note that I DID say she would have to pay it, and that my suggestion was a long shot. I also did not refer to the whole ERC being removed - but to see if she could negotiate for remaining with them. A quick phone call takes little time and the lender can only say no ... instead of not asking the question .... only a thought !

We do ALL know that ERCs are just that, a contractual term of the mge agreement - I merely like to consider all options before accepting my fate.

I didn't mention letting, as the OP did not give the impression they want to do this - but yes thats another clearly obvious answer to the problem.

If the OP does decide to let and obtain consent to let from the lender, I would suggest (as they are os of the UK to monitor the property) to have the letting managed by an ARLA letting agent.

They also need to be told of the financial consequences of doing this - declaring income for tax purposes (self assessment) and also CGT - a sum which may equate to more than current ERC of 6k.

For the OP, should you elect to keep the property, as the property will no longer be your main residence, upon the sale/disposal of the property, Capital Gains Tax (CGT) will be chargeable on any gain realised.

The amount of CGT payable will be equal to the gross gain, net of available allowances, and the period during which the property was held as your main residence, further adjusted, under current CGT property tax regs, to include an exclusion of the last 3 yrs of ownership from CGT liability.

Important to give the whole picture.

Hope this helps

Holly

Thrugelmir

mondays wrote: »

We are moving to Australia and the near £6000 ERC :eek: we have to pay to break our mortgage is not helping my spreadsheets of income/expenses!

With the £ - Oz $ exchange rate almost at a 52 week low. Not a great time to be moving...... 1.49.

3 years ago was getting around $2.30 to a £.

somethingcorporate

holly_hobby wrote: »

They also need to be told of the financial consequences of doing this - declaring income for tax purposes (self assessment) and also CGT - a sum which may equate to more than current ERC of 6k.

For the OP, should you elect to keep the property, as the property will no longer be your main residence, upon the sale/disposal of the property, Capital Gains Tax (CGT) will be chargeable on any gain realised.

The amount of CGT payable will be equal to the gross gain, net of available allowances, and the period during which the property was held as your main residence, further adjusted, under current CGT property tax regs, to include an exclusion of the last 3 yrs of ownership from CGT liability.

Important to give the whole picture.

Good advice.

More info here:
http://www.hmrc.gov.uk/helpsheets/hs283.pdf

Engeroosi

Seen as they have resided in the property they are exempt of CGT for 3 years I believe but would have to pay tax on any income from renting the property out. So assuming the ERC will run out in the next 3 years they could sell up and avoid the CGT.

holly_hobby

Engeroosi wrote: »

Seen as they have resided in the property they are exempt of CGT for 3 years I believe but would have to pay tax on any income from renting the property out. So assuming the ERC will run out in the next 3 years they could sell up and avoid the CGT.

Yes I've already covered this in an earlier post - as advising the OP to simply rent out to avoid ERC is not the whole picture. Quite apart from gaining the lenders consent, there are tax & property maintenance implications to also consider.

As discussed earlier, the OP will need to delcare rental income for UK tax purposes (mitigated by allowable deductions such as mge interest, letting agt fees, up keep etc). They will be living in Oz, so they will need to consider how this will be addressed i.e have the letting agt manage this, employ an accountant etc.

How will the rental income be paid to them ? Will it be transferred to their Oz bank account (possible reduction in real value due to prevailing exchange rates). Or maintain a UK bank account, and have the monies paid into this, withdrawing when the exchange rate is most attractive ?

Under current UK CGT property tax law, the last 3 yrs of property ownership (for pre-owner occupied) are exempt, as they are treated as if the property were (during the period) the sellers main residence.

If the OP sells, as suggested, within the next 3 yrs, then there will obviously be an overlap on exemptions .. i.e the period they owned and lived in the property as their main res & the last 3 yrs of ownership.

However, it is not as easy as saying "just sell in the next 3 yrs" and avoid CGT - quite apart from the fact that the OP will be permantely living in Oz (thereby ordinarilly resident & domiciled for UK tax purposes) , there may still be ERC penalty of 6k (if not on a sliding scale), and there well may be no buyers around for a while. Depending on how the recovery & market demand goes (and the level of borrowings on the property), it may have even edged into neg equity at that time.

Now, I am NOT saying these issues will happen (delayed sale, neg equity), but you must give the OP all points to consider, both positive and negative, in order for them to make a balanced and informed decision as to the most suitable course of action that suits their requirements. As they would not be retaining the property as an "investment" or "source of income" - in full knowledge, acceptance and the financial position to accept and absorb any risks assocaited with the property market - but rather to solely avoid £6k worth of ERC fees ....

I raise the points I have, not to be negative or a party pooper, but as a responsible poster, as at the end of the day if assumptions made here (mine or anyone else's) do go belly up in a negative manner, then it won't be anyone other than the OP who will be left picking up the pieces ...

I am not anti-let on this, far from it, if it saves the OP £6k or any monies, but I just think that although letting out is a simplistic solution in itself, there are other considerations in this particular case that may complicate matters (inc remote management of the situation/letting agt from Oz, including the taxation position of income and gains taxable in the UK whilst resident and domiciled in Oz - of which UK and OZ luckily have a double taxation treaty/agreement in place) - and its important that the OP considers all aspects as part of their decision making process.

OP - I have included a link to the HMRC site which will broadly explain and help you understand how your residency and the your position for tax in the UK is addressed under the current double taxation treaty, and how it may be applicable to you :-
http://www.hmrc.gov.uk/cnr/app_dtt.htm

Hope this helps (sorry if I've wittered on but the points raised are important considerations )

Holly

mondays

Hello

Thanks for all the posts and for your encouraging words Thrugelmir! Moving three years ago wasn't an option for us and neither is chancing moving in three years when the exchange rate might have improved.

Holly you have gone to great lengths and your posts are very informative. Unfortunately we have looked into letting the property, however because it is such a mighty and expensive move going to Australia we have to sell in order to go and everything is already going through the motions.

I may have to try asking a friend who is a lawyer to see if they can shed any further light on it all.

Will keep you posted.

Thanks again. :-)