Releasing equity on a right to buy property?

grey_lady

Bit unsure about this so hoping that someone with mortgage knowledge can advise but my friend bought his council flat under the right to buy scheme, the council has a second charge for one more year, the lender gave permission to rent out when my friend had to move and it is currently generating almost double the mortgage (and yes the tax man knows). The mortgage is about 50k on an approximate value of 120 friend has been spending all his cash on overpaying the mortgage as he wanted to pay it off. Here's the thing, now he wants to buy a place with his partner and he approached his lender about releasing some equity, lender said no. Seems like he should have been saving the cash rather than overpaying!

Is it worth his approaching a broker to see if a buy to let lender or a secured loan would be feasible in this case? So he could release some equity, or does he have to wait a year for the second charge to come off? (he doesn't want to sell)

kingstreet

For your friend to be able to capital raise, he would need the agreement of the local authority by way of a deed of postponement of their second charge. Over the years, these have become more and more difficult to arrange as councils have tried to prevent buyers borrowing into the council's discount during the council's five year pre-emption period.

He could try a secured loan, as they may be willing to accept what is effectively a third charge. This will have affordability implications for the mortgage he wants for the new property.

In the first instance, will the mortgage lender allow him to re-draw his overpayments, returning the mortgage to the level it should be, without increasing it above the level it would normally have reached by now?

grey_lady

Nope, Santander have said that they won't allow him to redraw any of the overpayments.

Not sure how the authority agreeing to postpone their second charge would help?
Btw the the second charge is the discount period

kingstreet

grey_lady wrote: »

Nope, Santander have said that they won't allow him to redraw any of the overpayments.

Not sure how the authority agreeing to postpone their second charge would help?
Btw the the second charge is the discount period

If the authority agrees to postpone their second charge he could repay his current mortgage and take out a new one, and the new one would still be a first charge.

Normally, if you pay off a first charge, the second charge is promoted to a first charge and that wouldn't be acceptable to a new mortgage lender.

The current second charge is the applicable percentage of discount received for the remaining twelve months of the five year pre-emption period. ie The amount he would have to pay back if he sold the property today.

I'd suggest he talks to an independent or whole market broker.

grey_lady

Thanks for explaining that, would a secured loan be an option at all? And then remortgage in a years time to pay it back?

kingstreet

grey_lady wrote: »

Thanks for explaining that, would a secured loan be an option at all? And then remortgage in a years time to pay it back?

Aye. Looks like the only way to approach the issue now. Watch out for heavy penalties to repay secured loans in short term though!

grey_lady

Many thanks!