Building a house in our garden to help pay off existing mortgage.

michmush77

Hi,
Myself and husband have a few ideas to get our current mortgage down.
We have some land on the bottom of our garden where we can build a 2 bedroom bungalow.
The question is how to go about it....
My mother in law is willing to lend us the money to build the house which we have to pay back on completion. Say £70,000

My question is.....when the house is built, can I then Get a mortgage to release equity to pay my mother in law back and pay a whack off on my mortgage.... Say pay mother back £70,000 and pay £50,000 off on my current mortgage...then I will rent out 2nd property for £650 a month which will pay for mortgage payments (£120,000), this house will be our pension fund in 20 years time.

Our immediate plan I to get our current mortgage as low as possible.

So in a nutshell, could I get a mortgage for £120,000 after the house is built.

Or would it be better to get a self build mortgage and not bother borrowing money of mother?

I'm baffled!!

anselld

Borrowing money from MIL is bound to be cheaper than getting a self build mortgage.

You should be able to get a BTL mortgage fro £120k after the place is complete provided the LTV is 75% to less. However, there is no point taking a BTL mortgage to pay off your own residential mortgage as it will undoubtedly be much cheaper than BTL.

michmush77

Thanks you...

Will a mortgage company give a mortgage to a place that you already own?

Also we thought it might be better for tax reasons as we wouldn't be making a profit? Or am I wrong in thinking that.

I suppose I need to look at the difference between a residential mortgage and a btl mortgage.

At the moment we are stuck with a residential mortgage that we have had for 6 years as I have had 2 children and only working part time and our ltv is 80% hence why we are looking at ways to bring our current mortgage down so we can get a more competitive mortgage rate.

anselld

michmush77 wrote: »

Will a mortgage company give a mortgage to a place that you already own?

Yes

michmush77 wrote: »

Also we thought it might be better for tax reasons as we wouldn't be making a profit? Or am I wrong in thinking that.

You are probably wrong. Why would you do it if you were not making a profit?

michmush77

If I make £650 a month in rent, i will get taxed on a profit of £650 (if I don't have a mortgage on this property)
but if i have a mortgage on that 2nd property, the rent coming in would pay for the mortgage payment that month...No profit there, so not taxable......
but I would profit on my residential mortgage because I have decreased it, so lower payments.......do you see what I mean?

As I say, I'm confusing myself!

bouicca21

I don't follow your maths. In order to reduce your mortgage, you propose to borrow £120k. You don't know whether you can get planning permission, you don't have detailed costs, you have no idea about ongoing maintenance costs, you haven't indicated whether your income would actually get you a new mortgage, whether you have budgeted for interest rate increases, or even if you have the skills required to build a house, yet you expect people to be able to make serious comments on your back of a fag packet proposal?

Thrugelmir

michmush77 wrote: »

If I make £650 a month in rent, i will get taxed on a profit of £650 (if I don't have a mortgage on this property)
but if i have a mortgage on that 2nd property, the rent coming in would pay for the mortgage payment that month...No profit there, so not taxable......
but I would profit on my residential mortgage because I have decreased it, so lower payments.......do you see what I mean?

As I say, I'm confusing myself!

How are you going to repay the mortgage on the newbuild? Only interest is tax deductible. Capital has to be repaid from after tax profit.

If the property is empty who pays then ?

pleasedelete

I have a building plot in my garden and have looked into this. Borrowing from family makes it easier I would think BUUUUT

You need your mortgage company permission to do it. They may not agree as it devalues your house- so your house may be worth less than mortgage or loan to value may vary.

So my example. House with big garden £850,000 maybe. Some garden sold as building plot £150,000 (value actually unknown until you tried to sell it but last one went for that and not as good a road), House with smaller garden- harder to sell as currently unique- value maybe £700,000- maybe a bit more. New house build cost £300,000 (could be up to £400,000 if high spec/larger of 2 possible designs or building issues). New house value £700,000-maybe a bit more.

So overall a £250,000 profit if own and sell both but the issue is that original house is worth less. If mortgage company say no then the house cant be built.

phill99

Building a house is not as straightforward as you think. On top of your costs you will have legal fees as the title on your property will need to be split, building control and planning fees. Does that £70k include bringing services to the property? Add another £10k if not. And I can guarantee that £70k will rise.

You would be better off getting planning permission and then selling the plot. Will give uou a chunk of cash to pay against your mortgage and a much lower risk.

booksurr

borrowing from mother should in theory be the cheapest option (depending on her of course!)

increasing the size of the mortgage on your current residential property will be next cheapest but will depend on whether you have the income to support the higher loan. It is perfectly legitimate to spend the extra money borrowed on building the new house and to claim the extra interest costs against the rental income (see BTW re your tax position)

the most expensive option would be a self build mortgage - you will NOT get a BTL mortgage as the property must be ready to move into to get a BTL on it, it cannot be a building site!

Once built then you could convert to a BTL mortgage on the property but that would entail another set of arrangement fees etc. The BTL mortgage would be restricted to 75% LTV and also the monthly rental income must be at least 125% of the interest charge on the BTL using a 6% interest rate. If you want to borrow 120k to repay mother and pay off 50K of your own then the new house would need to be worth at least 160k and the rent must be no less than £750 pcm otherwise you will not be given a BTL

so your plan is somewhat unrealisitic. If mother needs to be repaid before you sell the new house then you cannot get the funds to do so without borrowing more on your current mortgage or taking a BTL whose size means you cannot pay off the 50K you want to reduce your own mortgage by

BTW - you are wrong in understanding tax. Only the interest element of a mortgage cost can be offset against the rental income in calculating your taxable profit. Therefore if you have a repayment mortgage (such as your current residential mortgage) the capital element of the monthly repayment is treated as taxable income

michmush77

bouicca21 wrote: »

I don't follow your maths. In order to reduce your mortgage, you propose to borrow £120k. You don't know whether you can get planning permission, you don't have detailed costs, you have no idea about ongoing maintenance costs, you haven't indicated whether your income would actually get you a new mortgage, whether you have budgeted for interest rate increases, or even if you have the skills required to build a house, yet you expect people to be able to make serious comments on your back of a fag packet proposal?

If I knew all the ins and outs, I wouldn't be on here asking....I'm asking advice from others before I start spending money on planning....others have given helpful ideas and advice, the problem with these forums are people like you making wisecrack comments.

Thanks to everyone else for their comments