FTB - Buying Below Market Value from Family & Overpayments

leccyblue

Hi All,

This is my first post here but have 'lurked' the forums for a long time - and they have been really valuable!

We are in the process of looking to purchase a property (the one we already live in) from our parents. They are willing to sell to us for below market value, in order to help us get on the property ladder. We have had the property valued at £160-£170k. The purchase price would be £125k, and we will have a £22k deposit, leaving £103k to be mortgaged.

So, our LTV based on a value of £160k is 64.38%, and based on the purchase price is 82.40%. Clearly, the mortgage rate available to us at those two LTVs differs significantly!

Additionally, we are looking to be able to overpay on our monthly payment quite considerably, for as long as we are in a position to be able to do so. We both earn a good wage and have no dependents (yet!). On top of our monthly payment, we'd be looking to overpay by between £800 and £1000 each month to try and reduce the capital balance as quickly as possible.

We have seen a mortgage from First Direct, a two year fix at 1.89%, which allows unlimited overpayments, max 65% LTV. Unfortunately though, they base their LTV on whichever is the lowest - either the valuation or the purchase price. As our LTV based on the purchase price would only be 82.40%, the mortgage rate then jumps to around 3.5% (from memory).

We've seen that Nationwide are able to base their LTV on the valuation for first time buyers, when purchasing at below market value - but unfortunately their rates aren't quite as competitive, and they only allow us to overpay by up to £500 a month.

Is anyone aware of any mortgages/mortgage companies that offer FTB mortgages based on valuation, and with a generous overpayment policy?

I guess there could be other options - if we took out a variable rate mortage with no tie-in period (with a lender we know offers good rates on a 65% LTV) do you think they would allow us to switch products soon after taking out the original mortgage; i.e. we become remortgagers/product switchers rather than first time buyers?

Would appreciate any help and advice!

Thanks.

gazter

"Unfortunately though, they base their LTV on whichever is the lowest - either the valuation or the purchase price"

Sorry, maybe i am missing something. If they (first direct) base their LTV on whichever the lowest, either the valuation or the purchase price, doesnt that mean, in your case it will be the purchase price, and therefore the 64% LTV?

kingstreet

No. He means where the purchase price is lower, the LTV is based on that, not the actual value for product LTV purposes.

GMS

There will be lenders who will base LTV against valuation as you are buying from family at undervalue.

A broker may be a good idea here. Alternatively speak to lenders and ensure they are clear on the transaction.

leccyblue

gazter wrote: »

"Unfortunately though, they base their LTV on whichever is the lowest - either the valuation or the purchase price"

Sorry, maybe i am missing something. If they (first direct) base their LTV on whichever the lowest, either the valuation or the purchase price, doesnt that mean, in your case it will be the purchase price, and therefore the 64% LTV?

Yes, they will base it on the purchase price (£125k) as this is lower than valuation (expected £160k). However the LTV on a £103k mortgage against a purchase price of £125k is only 82.40%, which puts us in a higher interest bracket :-(

leccyblue

GMS wrote: »

There will be lenders who will base LTV against valuation as you are buying from family at undervalue.

A broker may be a good idea here. Alternatively speak to lenders and ensure they are clear on the transaction.

Thanks, that's reassuring to know. Being completely new to this, as first time buyers, how do mortgage brokers work? Do they take a cut? Or will the mortgage company simply pay them a referral fee? Just trying to see whether we would end up paying more going via a broker if they have to take 'their cut'.

Thanks!

GMS

Depends on the broker. Some will charge a fee, others will be fee free. Ensure any fees are agreed up front should you choose to go down the broker route.

A broker could save a lot of leg work and deal with the lender on your behalf. The idea being the transaction is as smooth as possible.

Given that you are struggling to find the right lender a broker could be worth the fees as they could get you a much better rate based on valuation.

leccyblue

GMS wrote: »

Depends on the broker. Some will charge a fee, others will be fee free. Ensure any fees are agreed up front should you choose to go down the broker route.

A broker could save a lot of leg work and deal with the lender on your behalf. The idea being the transaction is as smooth as possible.

Given that you are struggling to find the right lender a broker could be worth the fees as they could get you a much better rate based on valuation.

Thanks. Will bear this in mind. Have only approached two companies so far - First Direct and Nationwide. First Direct will only lend against the smaller of valuation/purchase price - Nationwide will lend against valuation but will only allow smaller overpayments; plus their rates are slightly higher than First Direct. I'm sure there are lenders out there that will offer what we require - we were hoping the experience of the people on the forum might highlight who these are. It might just be a case of ringing round them all!

holly_hobby

If you don't want overpayment restrictions, you will really be looking at SVR products/or products with no redemption penalties - which will give you the flexibility you appear to desire.

Or of course, an Offset arrangement would give you the same benefit, but with you retaining access to the capital - again rates aren't gonig to set the world alight - but the flexibility may outweight this.

If you however want the benefit of a product (fixed, discount, etc) and overpayments, then I'm afraid you'll have to compromise on the overpayments side of things (at least whilst you're in the ERC term), which in the main is annual 10% overpayment (with a few allowing 20%).

As you can see, you need to sit down and determine what is really important to you, unrestricted overpayments as and when you choose, or a lower payrate but with restricted overpayments whilst in ERC period.

A broker will not only go through the figs with you, and help you determine what your driving asprirations are, but will source a lender that whom accepts Family Discounted Pchs as they stand ( ie market value/actual mge reqd ).

Whilst I do believe you need to see a broker, Yorkshire BS (YBS) accept Family Inter Linked Purchases (aka discounted family discounted pch), in which they base the LTV on the market valuation (although the initial mge borrowings themselves. may not exceed the actual discounted pch price ie 125k in your case, which is fine given you only want 103k).

Whilst YBS's standard products, as do most lenders, have a max 10% annual overpayment. They also currently offer (to direct customers) 2 offset mortgages pitched at 75% and 60% LTV. They both offer virtually unlimited overpayments either monthly or annually (but if you repay in full, you will suffer an ERC within the noted penalty period of the product).

As I say, they offer direct access or you may approach via an Intermediary and their dedicated Intermediary channel (Accord Mortgages), whom currently offer a much wider range of offset arrangements for you to choose from (so you can see engaging a broker can assist in many ways, not only sourcing products but allowing you access to exclusive intermediary only deals too).

However whether you elect to utilise a brokeris of course your choice - a whole of market independent borker will generally charge a fee, an estate agency based adviser may well work on the lender proc fee and associated sale commissions.

Difference between them, an EA or Bank adviser is typically (although not exclusively) new to the industry and gaining their stripes whilst being supported by the employer, and simply won't have the personal exposure or knowledge that the independent adviser will have gained over their yrs in the industry (EA/Bank advisers will also typically be tied or directed to use a panel of lenders, which may not give you the best product). In fact, there is an old saying "you get what you pay for" - and in my experience this is generally true of advisers (both FS and Mge) .

Although (an FS prof) I am not currently a customer facing mge adviser, I do however feel the need to add the disclaimer, that I am not recommending YBS/Accord, or saying you will secure a mge with them, but have discussed them generally as just 1 market lender, whose criteria and products may be attractive to you and your requirements, there may well be others ......

Hope this helps

Holly

leccyblue

Wow - thanks for your extremely detailed reply Holly!

I think you are right, it sounds like we could do with seeing a broker. We are in the very early stages at present, we don't intend for this mortgage to start until January 2014, however we are doing our research early so we can go into the process with a good understanding, so we feel like we are getting the best deal possible in the current market.

It does seem that wanting a fixed rate term, LTV based on market value, and the ability to overpay may be a little optimistic, and it might be that we have to prioritise a bit and as you say, decide what is most important to us. I understand that these three requirements don't make us 'good business' for a lender, as effectively we are trying to pay as little interest as possible.

I have spoken to First Direct again, and what they could offer is for us to apply for a no-tie mortage with them (i.e. their fee free life tracker @ 4.19%, max LTV 90%), and then as soon as we have completed on the house, and the mortgage is running, we can then apply to switch to a better product; since then we will effectively be 're-mortgagers', and will be able to borrow against the full market valuation. Of course there would be no guarantees on what the valuation would be, if it was above £158.5k then we'd have access to their best rates.

I have looked at the YBS mortgage, and it looks very interesting! Similar rates to First Direct, but without the hassle (and potential uncertainty) of swapping products. Also nice to have the flexibility to access the 'overpayments' should we ever need to.

Thanks for taking the time to reply, this info has been really useful!