Have I missed something here??

RenegMC

Hi all,

So just looking for some advice as we're looking to move house, but wanted to find out if the following works.

So I currently live with parents who are in their late 60s. They own a 3 bed semi which has been paid off for nearly 5-10 years, but they've never thought to maximise their return from it, or use it to make any additional moves (basically because of their age and attitude to risk).

I'm currently 27, earning £33k pa, with no real committments on out goings.

Collectively as a family unit, we have approximately £180-200k of cash savings (to which I have contributed)

I have spoken to some mortgage brokers who suggest my affordability would probably be around £150k for a mortgage, allowing us as a family unit to look for a house worth about £350k.

What I've been thinking of doing, was spending about £10k converting our current 3 bed semi into two flats, or even a room by room HMO set up, giving us rental income of between £1800-2500 (depending on the set up).

Now I understand that lenders won't look at our rental income towards the mortgage affordability (even if the rental income was in my name).

What we were thinking though, was would I be able to take my £150k mortgage, on a £350k house, get a tracker mortgage that allows consistent over payment without penalty.

Then, I'd be able to use the £2k~ to over pay each month on the mortgage.

Based on those figures the second house could then be mortgage free within 5-6 years?

This would also allow the flexibility that should we have gaps in tenancy for whatever reason, the mortgage will be based on my affordability anyway, so would be covered by my salary.

I know that the rental income would take me over the threshold for higher tax, but as both my parents are retired, it wouldn't for them, but we would still be living together so they would be happy to use that cash to pay off the mortgage (even if that meant it was regularly gifted or some other set up was created to channel that money towards the mortgage).

Any issues here that I've clearly missed?? (or any huge risks that we will be susceptible to that I've not seen?)

We do not wish to remortgage (even partly), nor put any risk on our current 3 bed, so worst case, we could always sell the second property and move back - even though the risk of that is low)

Thanks in advance for any advice

anselld

RenegMC wrote: »

What I've been thinking of doing, was spending about £10k converting our current 3 bed semi into two flats, or even a room by room HMO set up, giving us rental income of between £1800-2500 (depending on the set up).

There is no way you can (legally) convert a semi into two flats for £10k. The building regs requirements for sound and fire proofing are two expensive coupled with the need for two sets of facilities.

HMO is more realistic provided the Local Council are not already anti-HMO in your area with Article 4 directives, etc.

Thrugelmir

RenegMC wrote: »

Then, I'd be able to use the £2k~ to over pay each month on the mortgage.

Tax liability on the income?

RenegMC

Thanks for the reply.

We already have 2 bathrooms, and 1 large kitchen, so from what I can tell (I'm waiting on a few builders quotes), we need to build a kitchen upstairs (about £2-3k as its a small one), which involves a moving of gas and electric which will cost approx £4k together, a few other structural issues sorted which will be roughly £1-2k and we need to get leases drawn up, which will be the expensive bit maybe another £2k from internet research.

So assuming we could absorb these costs, (or indeed, rented it out as a full 3 bed semi) theres nothing to stop the plan for using this rental income to overpay on the mortgage to the extent I've outlined?

Thanks again

EDIT: Tax liability - could this be looked at in some manner? I own a ltd company so would it be possible to overpay using the ltd company, and paying the rental income into the ltd co too and offsetting the expenses against one another?

I'm not committing tax fraud this way (I think?), but they're genuine income and expenses which are property related, so should be able to be netted off even though it's different addresses; that's my logic at the moment, though I'm sure theres a provision somewhere stopping this from happening for some reason or other.

Let_Us_See

Yes, you have missed something - commonsense!

Why would your retired and risk adverse parents want to be involved in your scatterbrained ideas?

Isn't it time your flew the family nest and bought your own home? If you still see yourself as a budding property developer, then do it off your own back, and let your parents enjoy their retirement in peace and security.

RenegMC

@Let us See I can definitely see where you're coming from, but I take issue with a few things you've said there. These scatter brained ideas would only be scatterbrained if I followed through with them without proper advice. I've spoken to professional advisors who can only give options and don't tend to give advice as to whether something would work. I'm certainly not going to jump in without fully understand everything and having fail safe plans.

Secondly, I didn't mention in the original post, but their retirement isn't as peaceful as they'd wish. We live in a road full of tenanted properties, where our neighbours are noisy, they litter and harass other residents (we've had neighbours swearing blind at my parents over a silly parking matter), and they even feel insecure in their own home, having recently admitted that they fear our next door neighbour has installed listening devices in our house, as he seems to constantly know what they're up to, including where and when they've gone on holiday and even which hotel. There's no way he could know this legitimately.

Thirdly, I don't really want to be a property developer, I want to help them out, whilst also make the most of our cash and property. As for flying the nest, I agree, but it doesn't really work like that in our culture. To a certain extent I'm very much expected to live with them, especially as the youngest son with only an older sister who is married.

I am looking for the options to sort this situation out in a way that puts the minimum of risk on their current property, which is why I'm happy taking on a mortgage as much as I can without drawing any money on their house, so if worst case happens they/we can always move back.

If you have any advice to give from a position of compassion or a place that doesn't seem to think I'm a chancer using mummy and daddy's money (as that's kind of what comes across), I'd love to hear back from you.

I'll add, if this is genuinely a non starter then I wouldn't ever want to risk their retirement and happiness, but they don't entirely seem happy.
Thanks

Let_Us_See

How much is family driven, or is it simply your ideas?

So far you have confirmed:-

• your parents are in their late sixties and are risk adverse
• you do not want to be a property developer
• your parents would like to move for various reasons
• you would like to help your parents in retirement

Sell existing property and use funds/and or part of £180-£200k savings to buy a new home. The balance you utilise in low risk investments fitting your parents' risk profile.



Your comment "so if worst case happens they/we can always move back" summarises your thinking. You have the opportunity to provide your parents with a new home and financial security in retirement, don't waste it.

RenegMC

Let_Us_See wrote: »

How much is family driven, or is it simply your ideas?

So far you have confirmed:-

• your parents are in their late sixties and are risk adverse
• you do not want to be a property developer
• your parents would like to move for various reasons
• you would like to help your parents in retirement

Sell existing property and use funds/and or part of £180-£200k savings to buy a new home. The balance you utilise in low risk investments fitting your parents' risk profile.

Your comment "so if worst case happens they/we can always move back" summarises your thinking. You have the opportunity to provide your parents with a new home and financial security in retirement, don't waste it.

Thanks once more for your response.

I think I have massively misunderstood something then, which makes my seeking of advice completely justified.

I find myself unable to find the differences between your plan and my plan? Maybe if I resummarise where the financial transactions would be, it might help clear it up?

- We would keep the mortgage-free property, and either leave as a 3 bed, or carry out some renovation to convert into 2 flats, and let these out.

- With ~200k cash savings, we would put down the deposit on a new property, with an additional ~£150k on a mortgage with my name.

- We would then purchase a new property around the £350k mark, where all three of us would move, still leaving their house without any money drawn down on it.

- In the background and separate to the new mortgage/property, we would try and take rental income out of the existing mortgage-free property.

- The additional rental income would then go towards overpaying on the mortgage to help us pay it all off, or they could keep it each month, and I'll repay over the full term, either way, they'd then have an income in their retirement, over and above their company & state pensions.

Unless I've misunderstood (which is certainly a possibility), then:
- my parents still own their 3 bedroom property, which would provide them with rental income for their retirement (after the mortgage on the second property was paid off, or indeed if I just paid it off for the entire 25 year term instead, and they used the rental income for their own purposes, which I'd be fine with).

- We'd then own the second property (which had the mortgage on it), and in the worst case of being unable to afford the mortgage repayments (unlikely), we could always sell the new property, thus paying off the mortgage with the sale, move back into the existing mortgage-free property.

- Finally if we cannot find tenants, it doesn't entirely matter anyway as the mortgage on the property is based on my affordability and covered by my salary, and the other property is mortgage free, so any rental income coming out of that house is only a benefit...

They do of course tie up some cash, but they'd still have enough cash left over for their expenditure, after putting in whatever share they wish to of that deposit, and would certainly be making a better return on their cash compared to leaving it in savings, which is what they've done at the moment...

I honestly cannot see where the risk to this, so please if anyone wants to be as blunt as possible with what I've missed it'd be very helpful... If it's a no-goer, no biggie, but I can't at the moment (and neither can any one else I've spoken to about it) see where the downside is.HOWEVER, given I cannot see where the genuine risk is in this strategy, I am going to persevere till I find everything out before we do anything.

Your comment "so if worst case happens they/we can always move back" summarises your thinking. You have the opportunity to provide your parents with a new home and financial security in retirement, don't waste it.

I don't entirely understand this, as my thinking is to allow them to retain their mortgage free property, meaning they have an asset which isn't being risked at all?

I'm certainly not trying to take cash away from them, in fact even the new property would be theirs in my eyes, I'm just trying to work out a way for us all to move out of the area, to a nicer home.

I think maybe my explanations have simply over complicated it all.

Many thanks anyway. :beer:

gazfocus

I think you'll have issues trying to avoid the tax on the rental income.

As a straight forward rental (ie not going through your ltd company), you can only use the interest element of any mortgage payment in relation to the rental property to offset the tax liability on the rental income. As you have no mortgage on the rental property, you will have to pay tax on the full rental payment.

I also don't think your idea of going through your ltd company would work. The rental payments received by your ltd company would be classed as 'income', and could potentially end up being profit, for which the ltd company would pay corporation tax on. The mortgage overpayments would be seen as payments to yourself as director, rather than payments that can be offset against the rental income, and therefore, you are likely to incur additional tax on those payments.

I know you say you don't want to, but you might be better off remortgaging the property you intend to rent out, and use the money from that to buy your new house, then the rental payments can pay off the mortgage on the rental property. You will still have to pay tax, but only on the rental payments minus the mortgage interest. You would then also have your new house mortgage free.

Let_Us_See

RenegMC wrote: »

I'm just trying to work out a way for us all to move out of the area, to a nicer home.

I don't question your sincerity, only your judgement. Nothing could be simpler. Buy a new home using the released equity from the sale of your current unencumbered property, plus if required, some of your current £180-£200k savings. Cash purchase, home owned outright, can be in anyone or all names, no risk at all.

If you then want to speculate in property then fine, but at least your parents' new home has been secured.