Part Share in a mortgaged property

HeadAbove_2

Hi all,

I know this is a bit of a strange question but a friend of mine has asked me to assist them in putting together a proposal for them to sell a share in a BTL property they have to clear some other debts.

This property is currently on an interest only mortgage with a little equity (based on the average of 3 agents valuations) and they are looking to sell a percentage of the property (50, 25, or 20; not sure why anyone would buy less than 50 and I've explained this....) for cash.

Is this actually a legally viable option? My personal opinion is that if someone paid, for example, £50k for 50% of the property, then this £50k would legally be the lenders rather than my friends, therefore meaning they can't use the money to clear debts anyway?!

I've actually recently qualified as a mortgage adviser so I keep thinking I should be able to answer this without asking but I just can't get my head around the issue, perhaps it's more the legal slant I need?!

Any assistance anyone could give would be greatly appreciated

getmore4less

The purchaser will have to go on the mortgage.


Who is going to give up cash for 50% then be liable for the other 50% if "friend" defaults given they are in debt seems likely they will get into debt again.

HeadAbove_2

getmore4less wrote: »

The purchaser will have to go on the mortgage.


Who is going to give up cash for 50% then be liable for the other 50% if "friend" defaults given they are in debt seems likely they will get into debt again.

I knew that the purchaser would have to go on the mortgage given the circumstances, it was just whether it would actually be possible?

I agree that anyone taking up the proposal would have to be certifiable, I know I wouldn't consider it.......

I still can't get my head around the physical legalities of it; surely the (sum of money) paid would HAVE to become the property of the lender given that it's mortgaged?

holly_hobby

If going onto the mge ... this is

In essence a transfer of equity i.e instead of the propety being wholly mortgaged to your friend, now both you and they would be joint mortgagors. (if the lender following status checks, agrees to the tsf of equity/additional borrower).

The pch price your friend requires, to "sell" a share in the property/mge (in order to allow you to become joint mortgagor) would be payable in cash or other arrangement from you.

Whether your firend sells 50% or whatever for whatever price doesn't concern the lender - to them all that is happening is instead of 1 mortgagor they will have 2.

With regards to the legal side, you may want consider effecting the deeds as tenants in common, rather than the standard joint tenants.

Joint tenants property split equaly, upon 1st death the whole property will revert to the surviving mortgagor.

The benefit of tenants in common, is to enable each mortgagor to leave their % share within their will, and also to effect the share of the property in an unequal format i.e 70/30 or whatever is agreed.

No matter whether tenants in common or joint tenants - all mortgagors are jointly and severally liable to mortgage repayments - which I am sure you will understand if you're a (newly) qualified mge adviser (well done by the way).

How will the rental income be split ? Bearing in mind the new purchaser will have to declare any rental income recd for inc tax purposes too. (under £2,500 and PAYE earner, by adjustment to tax code, over £2,500 or if not PAYE earner, by annual self assessment).

There are also SDLT issues for the new purchaser to consider too, and your friend in selling a share in the property for cash, will be exposed to possible cgt bill (which may be nil dependant upon the figs involved and allowances, and if there are also any other owner occupier adjustments to be made).

So lots of things to consider, messy yes, worth the hassel and monetary risks ... well only the individual can really make that decision.

Just to put your mind at rest, I am an advanced qualified adviser.

Hope this helps

Holly

betmunch

I think what you need to get your head round is the order of the legal charges. Obviously you know the mortgage company gets first charge. The investor would have to protect his investment by taking a charge over the property for his share of its value.

I think your friends are thinking that they sell 50% of the value of the property to the investor and he takes 50% of the value when it is sold. However what they have failed to account for is that the mortgage company gets paid back first due to the 1st charge. The investor then would get his share of the money, but only if the property was worth enough to pay both the mortgage company and the investor back, which is unlikely due to the current equity position you mentioned

They could have the investors money pay back the mortgage and then he would have a second charge put on the property to protect his interest, but that would only help them repay the mortgage, which I am sure is lower interest and monthly payments than the other debts they are trying to clear.

Of course the investor could give them the money to pay off the other debts, but as this wouldnt reduce the mortgage at all the investors share wouldnt be protected at all even if he did have a legal charge for half the value of the house.

Or the investors money could reduce the mortgage balance and he then be added to the mortgage, which is a nightmare waiting to happen.

I think you need to explain how unattractive this is to any investor so they drop the idea!

HeadAbove_2

Thanks to both Holly Hobby and betmuch for your replies: I'll address any points separately in a minute.......

holly_hobby

betmunch wrote: »

I think what you need to get your head round is the order of the legal charges. Obviously you know the mortgage company gets first charge. The investor would have to protect his investment by taking a charge over the property for his share of its value.

I think your friends are thinking that they sell 50% of the value of the property to the investor and he takes 50% of the value when it is sold. However what they have failed to account for is that the mortgage company gets paid back first due to the 1st charge. The investor then would get his share of the money, but only if the property was worth enough to pay both the mortgage company and the investor back, which is unlikely due to the current equity position you mentioned

They could have the investors money pay back the mortgage and then he would have a second charge put on the property to protect his interest, but that would only help them repay the mortgage, which I am sure is lower interest and monthly payments than the other debts they are trying to clear.

Of course the investor could give them the money to pay off the other debts, but as this wouldnt reduce the mortgage at all the investors share wouldnt be protected at all even if he did have a legal charge for half the value of the house.

Or the investors money could reduce the mortgage balance and he then be added to the mortgage, which is a nightmare waiting to happen.

I think you need to explain how unattractive this is to any investor so they drop the idea!

If approaching it this way (ie not becoming party to the mge), the lender would need to agree to the registration of 2nd charge too. - which they may refuse.

Holly

betmunch

holly_hobby wrote: »

If approaching it this way (ie not becoming party to the mge), the lender would need to agree to the registration of 2nd charge too. - which they may refuse.

Holly

Good point, I would hope they would be ok with it, but you cant be sure these days!!!

Assuming the investor is that crazy as to take it up on this basis its the only way to get the money to pay the "other" debts though isnt it?

HeadAbove_2

holly_hobby wrote: »

If going onto the mge ... this is

In essence a transfer of equity i.e instead of the propety being wholly mortgaged to your friend, now both you and they would be joint mortgagors. (if the lender following status checks, agrees to the tsf of equity/additional borrower).

The pch price your friend requires, to "sell" a share in the property/mge (in order to allow you to become joint mortgagor) would be payable in cash or other arrangement from you.

Whether your firend sells 50% or whatever for whatever price doesn't concern the lender - to them all that is happening is instead of 1 mortgagor they will have 2. - I would have thought that whilst this is true a potentially sticky situation is that the now-joint mortgagor has already coughed up their supposed liability to the debt to the original sole mortgagor which they will have likely used some of. This would then mean that the investor has paid out what is deemed to be their share and will still be liable in the eyes of the mortgagee.

With regards to the legal side, you may want consider effecting the deeds as tenants in common, rather than the standard joint tenants. - I would have only ever said tenants in common anyway due to the issue you detail below

Joint tenants property split equaly, upon 1st death the whole property will revert to the surviving mortgagor.

The benefit of tenants in common, is to enable each mortgagor to leave their % share within their will, and also to effect the share of the property in an unequal format i.e 70/30 or whatever is agreed.

No matter whether tenants in common or joint tenants - all mortgagors are jointly and severally liable to mortgage repayments - which I am sure you will understand if you're a (newly) qualified mge adviser (well done by the way).

How will the rental income be split ? Bearing in mind the new purchaser will have to declare any rental income recd for inc tax purposes too. (under £2,500 and PAYE earner, by adjustment to tax code, over £2,500 or if not PAYE earner, by annual self assessment). - the rental income (and of course ongoing interest payments on the loan) would be split in the same percentages as the agreed deal (50:50, etc.). Even this would mean that against decent savings accounts the yield wouldn't be particularly attractive but like you say anything earned would be subject to income tax too.

There are also SDLT issues for the new purchaser to consider too, and your friend in selling a share in the property for cash, will be exposed to possible cgt bill (which may be nil dependant upon the figs involved and allowances, and if there are also any other owner occupier adjustments to be made). - property value wouldn't fall into the SDLT category and I'm staying away from CGT issues if I can help it.

So lots of things to consider, messy yes, worth the hassel and monetary risks ... well only the individual can really make that decision. - I would say really, really not given the workings I've done on compound interest in high rate savers but who am I to comment.........

Just to put your mind at rest, I am an advanced qualified adviser.

Hope this helps

Holly

Please see comments above - hopefully what I'm saying makes sense...

HeadAbove_2

betmunch wrote: »

Good point, I would hope they would be ok with it, but you cant be sure these days!!!

Assuming the investor is that crazy as to take it up on this basis its the only way to get the money to pay the "other" debts though isnt it?

I see your original post has already been responded to, thanks for the input.

I agree entirely with the last statement about the unnattractive nature of this deal and have been doing everything in my power to dissuade my friend from proposing the deal at all.

The legal charge aspect was what I think I was really struggling with, though my view was that an additional legal charge doesn't really exist, only in the eyes of the now-joint mortgagors which frankly isn't worth toffee to the lender.

Like you say, it does seem as though this is the only way to pay up the "other" debts, though I suppose a less complicated alternative would be to use whatever equity is available to create a second charge to consolidate but I don't think this would help at all due to the costs involved.

betmunch

HeadAbove wrote: »

I see your original post has already been responded to, thanks for the input.

I agree entirely with the last statement about the unnattractive nature of this deal and have been doing everything in my power to dissuade my friend from proposing the deal at all.

The legal charge aspect was what I think I was really struggling with, though my view was that an additional legal charge doesn't really exist, only in the eyes of the now-joint mortgagors which frankly isn't worth toffee to the lender.

Like you say, it does seem as though this is the only way to pay up the "other" debts, though I suppose a less complicated alternative would be to use whatever equity is available to create a second charge to consolidate but I don't think this would help at all due to the costs involved.

I really dont think you should be considering joint mortgagors at all. If one party stops contributing to the mortgage the other party will have to pick up the slack, which will be outside of any agreement.

In my humble opinon the only way forward for this would be for the new invester to take a second charge and accept that in the early years he has very little, if any protection for his investment.

Theres no reason why the second charge has to fit within the equity though, so that doesnt have to limit it.

Keeping the mortgage in your friends name, and the investor having second charge keeps things simple. Your friend would simply own a property with more money secured on it than it is worth.

I would put this to your friend as the only way to do it safely for him, which it is. and then tell him you are 99% sure he wont find anyone to invest, but allow him to find that out for himself if he wants to.