Mortgage Advice for a not so straightforward situation

gingerjimlover

Hi Everyone,

Right the hubby and I need some advice and hope you guys can help, please bear with me as the situation is long winded.

The In-Laws have a house which is becoming too big for them however if they sold the property they will not have enough to downsize in the town they live in (ex-LA house in need of some work and in a second home hotspot).

So we have agreed to pay for the house to be converted into flats (planning not in yet but it has been done in the same street), the In-Laws will live in the bottom and we would own the top (renting this out).

Now.... They have a small mortgage c.£36,000 outstanding on the property which has 2 years left.

As they are getting older they are really anxious of being able to keep paying their mortgage with their health becoming an issue so we are willing to 'buy' them out.

We do not own any property do are FTB and are blind into what mortgage types, pitfalls and considerations are out there so we need to know.....

What type of mortgage should we go for knowing that we are going to convert the house?
Is there anything else we nee to consider?

Thanks in advance
Gem

gingerjimlover

Oh some extra info to help
House current value approx. £185k
Flats would be worth approx. £125k each when completed
We would 'buy' out for around £45k

Senior_Paper_Monitor

You don't need advice from a forum - you need advice from a good broker and solictor (eventuially one solicitor for you and one for parents).

More potential problems (I'm not saying its not doable) here than I can raise the enthusiasm to list I'm afraid.

Thrugelmir

gingerjimlover wrote: »

What type of mortgage should we go for knowing that we are going to convert the house?

How are you going to finance the conversion work?

holly_hobby

Right .... is this correct ?

You are to buy Mum and Dads house from them with a mortgage, and then split the property into flats ?

Mum and Dad are to live in the ground floor flat (as tenants ?), and there will be how many more flats/levels to the property ?

Will you also live in the property (one of the flats ?)

Firstly, we have issues with the works being done whilst under any residential mge (which would be a property for a dependant approach), second issue is the vendor remaining resident post sale (lenders have an issue with this re possession rights), thirdly you will be doing significant works that will compromise the lenders security, and you must have their permission to conduct the works (and the pennies to pay for it !). Now as this isn't an extension, but a converstion of use from residential to semi-commercial, it'll be tricky ....(thats of course if its declared as it should be ....)

Then post works (assuming you don't live there), if you wish to keep Mum and Dads as a residential mge (ie they won't be paying you rent), you will need to split the deeds (assuming each flat will have be fully self contained, with its own front door, although access may be shared i.e shared main door, communical hallway, stairs/access to upper floor(s) ), and then have their flat re-mortgaged under a provision for dependants mge (which can be on std residential terms), with the top flat put onto its own BTL mge - as it will be let comercially. (splitting deeds or title - just means that you are changing the recognised legal status of the property from say 1 dwelling into 2, 3 or however many self contained flats its been split into.

It is a v complicated subject to discuss on here without starting to confuse you ... the main thing is securing finance for a property that is known for day one , to be converted to a flats ... thats the sticky point, and in reality a development loan is really what you're looking for.

Bit more meat on the bones will help with a better guide, but yes, ultimately you need to seek an experienced commerical broker on this, the later splitting of deeds if required, is your conveyencers role and quite simple.

Be prepared that you may not achieve what you want if a mge is required to get everything rolling ......

Hope this helps

Holly

Lilla

I will agree with Senior Paper Monitor, the best thing you can do is discuss your situation with a broker, who can then review your financial situation, discuss the various aspects of your proposed transaction and help with advice.

I've dealt with complicated cases before, but yours is truly up there Having said that, there is hope, but please do seek proper advice, as any advice on a forum will be limited and you'll need to speak to a broker in the end anyway to establish the most appropriate mortgage arrangement.

gingerjimlover

I had a feeling that it would be more complicated than the hubby thought

Thank you Holly Hobby for your guidance and I am glad to come top of the complicated list Lilla

Will book in with a broker, can anyone recommend one? We live in Norfolk.

Holly Hobby - say we got a developer mortgage, would the mortgage then be for the whole property when the flats are completed or would it be split between the two?

If anyone still wishes to give advice the answers to the questions Holly Hobby asked
Two flats with own front doors
In-Laws will live rent free
We will not be living in the other flat
We have a little money saved for the conversion currently and this increases each month that passes.

holly_hobby

Initially it would be for the whole unit ...

Then once the flats are completed, with all relevant LA sign offs etc, you can seek to split the deeds i.e each flat will have its own new set of deeds, meaning that they are their own entities, and can be indepenently mortgaged of each other, as they would be separate units.

At the same time as the conveyencing for splitting the deeds, you seek to remortgage Mums onto a residential mge (which would be a that for a dependant/2nd property) so the income of the applicants/mortgagors i.e you and hubby, would need to be sufficient to service the loan. With the monies from this obv going to partially redeem the developement loan.

You, at the same time as splitting the deeds for the 2nd flat, remortgage that onto a BTL mortgage (max 75% LTV for first time landlords). Again the monies raised go to fully redeem the residual balance on the developement loan.

Thats of course assuming that they value up and the max LTVs available are sufficient to fully redeem the development finance.

The only issue I see with the BTL (apart from the rental income/mge ratio being satisfactory), is that you say the property is ex-LA, which I presume was purchased under a RTB by Mum/Dad. There are a few BTL lenders whom don't like ex LA properties ... so thats something to bear in mind.

And thats assuming that you find the capital to actually fund the conversion (if all LA permissions to convert are obtained).

So .. the issues you have are ...

1. Sourcing the additional capital reqd to fund the conversion

2. Sourcing a development mge to fund the initial property purchase (the continued residence of the vendors post completion, may cause an issue)

3. Obtaining a ballpark fig from local agents, of what the estimated market value of sc flats (once split), to establish if sufficient remortgage monies can be sourced to fully redeem the developement loan

4. Obtaining from local letting ags, the average rent for the spceification and location of the flat to be let.

5. Obtaining a rough guide as to how much you would be able to remortgage (on a residential mge) Mums flat post conversion (salary and market value will dictate) - and having those figs whether its a viable option to the whole exercise, which goes for point 4 too re the rental income oppossed to mge payments.

Establishing the answers to the above, is paramount, before you get too far down the lane with this one .....

On the face of it, its not impossible, but you need an experienced broker whom doesn't solely concentrate on residential business ... as initially there are commerical aspects to this case.

Hope this helps

Holly

getmore4less

I think you can solve some of the issues if you end up with

2 leasehold flats

parents own one mortgage free ( the primary aim)

You own the other and rent this flat out

You can deal with the freehold as you own it or joint owners with the leases.


Top level finances will be something like

parents
£185k-£125k so you owe them £60k they pay off their mortgage leaving them with £24k(adjusted for freehold and any gifts) and a flat lease in their name.

You need to raise the £60k + the build funding and probably end up with a BTL on the flat or some other way.

No deprivation of asset issues, no dependant residant issues.

Getting there raising the funds is the issue.

getmore4less

Whats the current mortgage sitution?

Is it repayment or is it interest only with an endowment around?

Have you got estimates for the build costs, talked to the developers of the other converted properties.

holly_hobby

For flat 1 (mums) to be completely mortgage free, the value of flat 2 for mge valuation purposes, would need to be sufficient to release enough equity at 75%, to entirely repay the whole finance used to develop the property. (which has be repaid upon split of the deeds, as it would have been secured on the original single title deed, which will be invalidated at the point of split).

Thats a big ask .... we also have issues re BTLs and an ex-LA dwelling, I don't suppose achieving sufficient capital is impossible, if not unlikely .... but I haven't seen the property, or the area, so it may be of course be entirely possible !

The issues remain regarding sourcing the initial finance to get the ball rolling, and a lot of number crunching regarding the actual figs, to determine if this whole exercise will be a sound one (both financially and as an investment re the 2nd flat to be let, if Mum/Dads flat is mge free, permitting title in their name).

Apart from the figs to ensure the BTL will earn its keep, the OP also needs to look at the re-sale values/demand of a converted LA property into 2 SC flats ... as at a future point this may be pertinent.

Ooh just a point to note - its imperative that the flats are registered as leasehold when split (OP to be the freeholder), to keep the future marketing of them as open as possible, as mges for freehold flats are as rare as hens teeth, and therefore so will their potential buyers !

Hope this helps

Holly