Buy to Let Mortgage

Mr0

Hello, I have an awkward situation and looking for some tips.

I posted regarding my father's mortgage some time ago and that is going well at the moment, I would like to thank everyone who helped me before.

For the past year or so my whole family has been saving heavily and repaying my father's mortgage and at this rate the debt will be completely repaid by September next year, so about 12 months.

When this is done, rather than leaving saving mode, we would like to help my brother buy his home, rather than paying ever increasing rents. He currently rents from a housing association. He does not get any benefits (apart from the lower rent) and there will be no discounts when buying.

The house is worth £350,000. Our total income is about £70,000 (me, my brother and my dad, plus his rented home). But none of us will be able to get a mortgage individually, and we would like for the home to be in my brother's name only. My brother only earns about £15,000 a year.

I have been reading up on buy to lets and the lending criteria seems to be quite different.

My dads home, which used to be our family home is currently rented out earning £30,000 a year, valued at £575,000-600,000.

After the original mortgage is repaid, would it be possible to borrow the whole £350,000 and buy my brother's home outright on a buy to let mortgage on the rented home, releasing 60% of the equity.

The home is already rented out and we have been renting to the same person for the past year, he is under contract until November and it is very likely that he would want to stay (he asked us for a 5 year fix last year), would our mortgage application be easier if we do have a contract for 5 years? We are 'used to' paying 3-4k a month on the mortgage now, plus the rent saving after buying the home, we can definitely afford it.

I understand the interest may be quite high initially, but it is probably about the same as the rent he is currently paying.

Also there is no issue with trust etc between my family (I hope). We all contribute what we can.

So I have 2 questions really.

1) Would we get a buy to let mortgage on those terms.
2) Would the housing association accept such an application (purchase home from gifted money).

Thanks in advance.

holly_hobby

Yes, with rental income of 30k pa, and with a value of 575k upwards, you should be able to obtain a 350k mge on the current rented property via a BTL remortgage.

How much of the interest associated with this that will be a permitted deduction against rental income (under capital withdrawal regs), will depend upon its value when it became available for letting. As under equity release the permitted amount of mge interest that may be offset, will be capped at this sum.

I can't see how the HA will object to the source of your Bro's purchasing capital, if it is documented as a true gift (ie made without condition, or claim to any beneficial rights under the property).

To ensure you obtain choice from all available lenders, I would recommend a mortgage broker, whom whilst not only offering you access to intermediary only deals, will support you throughout the application process and beyond.

One point that I should also make is that the gift coming from Dad via property equity release, will be that it will be classed as a Potentially Exempt Transfer (PET) for IHT purposes. Which whilst becoming exempt if Dad survives for 7 yrs post donation, will cause a liability issue if he passes within that time, and his NET estate (inc non-exempt gifts) exceeds the nil rate IHT threshold (currently 325k per person, but upto 650k if there is any unused deceased spousal allowance remaining (which could exceed 650k if there is more than 1 decd spouse in the background), for application of transfer to Dads own IHT allowance, by his executors (or administrators in the case of no valid will at time of death).

So, a little estate planning and updating of wills is reqd, with any trust docs as you feel necessary, is advised - your IFA/HNW adviser and Solicitor , should be able to assist.

Hope this helps ... pop back if you need anything else.

Holly x

Mr0

Thanks Holly. I really needed to hear that.

If I understand you correctly, the house was worth about £450,000 when it was first let out in 2008 (I think). Does this mean that only interests up to£450,000 is tax deductible? If so, it is not something we have to worry about as the amount we want to borrow will be much less.

I am aware of the IHT issues, I spoke to him about it before but my Dad doesn't really want to go to a IFA, nor does he have or want a will. Although he does plan to give up most of his assets to reduce the size of his estate, though he is only 57.

One thing we thought of was for him to transfer the rented home to my name and then for me to borrow on the same basis (buy to let) and give to my brother. He will still have another home where he is currently living in, so it will still be over the £325,000 limit, so a bit more to go. I already worked out that if this happens there will be no capital gains tax (it was his only home for many years) to pay and I think no stamp duty is payable as long as the mortgage is repaid first. Then 7 years later the whole amount will be exempt from IHT.

I just worry that they will not allow a mortgage on a property that was owned for such a short period of time (after we change the name). This will also mean no previous rental history, although it is the same house renting to the same person. Is this something that I should worry about?

Also do lenders still require a high income apart from the rent to support the mortgage. I checked the HSBC website and it says that they require an income of £50,000. I read that HSBC criteria is strict, but I only earn about £20,000 and my dad isn't even working full time any more (he lives on rent and part time work). Would we be able to get a mortgage based only on the rent? Sorry should have included this information in the first post.

Also, I am self employed, I prepare my accounts myself, and they are not audited. I couldn't get a mortgage a few years ago because of this (residential mortgage).

Thanks again.

holly_hobby

Mr0 wrote: »

If I understand you correctly, the house was worth about £450,000 when it was first let out in 2008 (I think). Does this mean that only interests up to£450,000 is tax deductible? If so, it is not something we have to worry about as the amount we want to borrow will be much less.

Yes, permitted deductable mge interest will be capped at 450k (assuming that was also when it first became available for let), whilst this may not be relevant now, it may later become so if Dad wants to effect a further equity release exercise down the line (rental income supporting of course)

Mr0 wrote: »

I am aware of the IHT issues, I spoke to him about it before but my Dad doesn't really want to go to a IFA, nor does he have or want a will. Although he does plan to give up most of his assets to reduce the size of his estate, though he is only 57.

If no valid will at point of death, apart from it making matters more complicated, the distribution of his estate on death will follow intestacy regs, which may mean that the format that takes may not suit his requirements (inc distribution to any surivivng spouse, even if the relationship has broken down and they are no longer a couple - if not divorced then she's a beneficiary under intestacy regs and other issue (ie children from other relationships etc) even if there is no current relationship).

Being healthy and in his 50s doesn't indemnify him from death .... it can happen at any time .... and given the potential size of his net estate, I woudl really encourage him to grasp the nettle on this.

Mr0 wrote: »

One thing we thought of was for him to transfer the rented home to my name and then for me to borrow on the same basis (buy to let) and give to my brother.

This may expose him to CGT (and deprivation of assets, but given the £ he appars to have I doubt he would be apply for Meants Tested benefits or Long Term Care assistance in any event).

How long ago did Dad vacate the house, more than 36 mths ?
How long did he live there before he left ?
What was the original pch price ?

Depending upon whether this tsf is done whilst mortgaged, and how that is managed, you may have SDLT exposure.

So, not to be done without further tax guidance .

Mr0 wrote: »

He will still have another home where he is currently living in, so it will still be over the £325,000 limit, so a bit more to go. I already worked out that if this happens there will be no capital gains tax (it was his only home for many years) to pay and I think no stamp duty is payable as long as the mortgage is repaid first. Then 7 years later the whole amount will be exempt from IHT.

Possible, but I need answers the above qs to confirm.

Mr0 wrote: »

I just worry that they will not allow a mortgage on a property that was owned for such a short period of time (after we change the name). This will also mean no previous rental history, although it is the same house renting to the same person. Is this something that I should worry about?

Generally 6mths min ownership pre any remortgage application.

How no rental history if its rented ? Please tell me this isn't done on a handshake, and you have an AST (max 6 mth tenure per period for any mge lender).

Mr0 wrote: »

Also do lenders still require a high income apart from the rent to support the mortgage. I checked the HSBC website and it says that they require an income of £50,000. I read that HSBC criteria is strict, but I only earn about £20,000 and my dad isn't even working full time any more (he lives on rent and part time work). Would we be able to get a mortgage based only on the rent? Sorry should have included this information in the first post.

HSBC are non-intermediary (dirct access only), and have quite restrictive lending criteria to maintain a high quality mortgage book. Don't be dis-heartened, a min 50k income is far from the norm in the BTL sector.

As an existing landlord there are lenders whom wont have the min income requirement for Dad.

Yourself, yes there will be issues but the low LTV may help with a couple of lenders .

Another option instead of full tsf, would be for you to become joint owner with Dad, which under a Joint Tenancy agreement means that upon death the property automatically tsfs to you, without forming part of his estate. (refer below re SDLT).

However, don't forget its his NET (of liabilities) estate thats exposed to IHT - so having debt actually reduces it (with for example term assurance written under trust to satisfy the creditors)

Mr0 wrote: »

Also, I am self employed, I prepare my accounts myself, and they are not audited. I couldn't get a mortgage a few years ago because of this (residential mortgage).

I assume you have a Ltd Co, hence the audited accounts request ?

As long as you have SA302s demonstrating your income, thats more important in todays underwriting. (although they can also request sight of accounts too).

I cannot express enough that Dad needs to obtain estate/IHT mitigation advice from his own HNW adviser - go along with him if he feels nervous.

Hope this helps

Holly

Mr0

Thanks again. Alot of info there.

I have basic understanding of tax but most likely not as much as you, so please correct me if I am wrong.

The property was purchased in 2004 for £360,000. Current Value is at most £600,000. We lived in it for 4 years as our main home, then let it out as his business took a hit in the recession. If we transfer it in 2014, there will be 10 years of ownership. 4 + 3 Years will be exempt from CGT under PPR Rules and a maximum of £40,000 of Letting Relief is available.

Gain = £600,000 - £360,000 = £240,000
PPR = £240,000 * 7/10 = £168,000
Letting Relief for the 3 years in between is capped at £40,000.

Taxable Gain = £32,000

He has a Capital Loss of £30,000 carried forward from when he sold his business to me. It was purchased for ££40,000 17 Years ago. It was loss making from 2010-2012, so I think a £10,000 is a fair market value for it. According to the HMRC website, capital losses to connected persons can only be relieved against capital gains made from the same person. So this loss is allowable if the transfer is made to me only.

The Remainder of the gain is covered by his annuall allowance.

I believe stamp duty is payable on consideration (or debt), hence why we should wait till the mortgage is repaid first. This should be at the earliest in November 2014.

There is a contract in place. I meant that if I transferred the house to my name, I will have no rental history, which might look unfavourable. The tenancies were always for 1 year at a time, except last year, which was for 2 years until November 2014.

Can you explain why it would be a bigger problem for me than my dad to get the same mortgage? Is it the age or net worth. I don't have any savings at all at the moment, everything I had I helped repay my dads mortgage at the beginning of the year. I do have a higher income than him though, but still not alot (if you ignore the home), as he has stopped working full time, and most likely wont go back into full time employment.

I am a sole trader, I didn't earn enough at the time to make a Ltd company worthwhile. I tried to explain that even smaller owner managed companies are not audited anyway, but I was outright refused.

Would I still need the same accounts and SA302s for the buy to let mortgage?

I agree an IFA would be beneficial to my dad, and I will try to talk to him more about it. Though he does not usually bother with such things. He gets me or my brother to arrange all his bills, contracts etc.


Thanks again for helping me out. Really appreciate it.