Best way of funding buyout of co-owners on inherited property (second property)

zailrand

Sorry this is quite long – please feel free to scroll on by! I posted a similar post on the house buying forum but as it’s specifically mortgage related I thought this was the best place to post to get more specific advice (I’ve noticed a lot of mortgage brokers post on this forum!)


So this is the situation:
Last year I inherited 2/3 of my mums house in a rural northern location. The other 1/3 is owned by friends of hers and there is a declaration of trust to that effect.Original plan was to sell and I had an offer in on property for £168k but now we have decided to buy others out and live in 2 locations (with a view to eventually either selling or BTL city home and moving to countryside when I retire) – husband mainly up there (he is retired) me staying in city mostly and keeping my job. House will need some updating work doing- heating system is most pressing as currently inefficient coal fire and storage heaters.

Current city house is valued at approx. £335k and mortgage is @£57k (12 years left to run, although 8 with current offset position)- this is currently fully offset with £19k of the offset moneys belonging to us and £38k loaned by my stepfather. Rate on this mortgage is 3.69% - as it’s been fully offset until now I haven’t worried about rate.Mortgage is currently being paid from offset account and as part of the payback agreement to stepfather I am paying his rent (£580 per month, same as our current mortgage repayment).
In addition to the £19k we have in the offset account we have approx. another £10k of savings (mostly in a cash ISA). Debtwise we just have the mortgage a personal loan of £11 k which I took out last November to fund a car purchase (repayments £200 per month).Credit card wise, husband has one he doesn’t use, I have one I do use and zero the balance on every month, plus 2 that are dormant from when I played the 0% credit card game. Both of us have good credit histories.
Gross income is currently £45.5k (due a £1300 incremental payrise plus a 1.7% cost of living rise next month), husband approx. £28k through an index linked pension. I am 49 he is 62. Neither of us have any dependents.
Buyout cost for the other party will be @£56k, plus 3% SDLT rate on second home plus solicitors fees etc.
So… my query is about the best way to do this… It seems we have several choices as follows (I’ve taken into account husbands age and have looked at lenders who will go beyond 75 and I’ve also looked at affordability, assuming a 7% interest rate as that looks like the figure that mortgage co’s will now stress test at…):

• Keep things mostly the same - Use all cash from offset account plus cash from the ISA to buy out the other owners and keep current mortgage at 3.69%. Stepfather would be happy for me to do this as long as I keep paying his rent, but that would then mean paying 2 x £580 per month (current mortgage plus his rent) until his £38k is fully paid down (5.4 yrs) and would leave us very little in savings. Take out personal loan next year to fund renovations.
• Switch mortgage deal on current house onto a better deal as mortage will no longer be offset as will use cash to fund the purchase (same term, better rate – mortgage is with Britannia and they won’t go over 75 for husband) and use cash as above – liability then £580 per month for 5.4 years plus a reduced mortgage payment (could be as low as (£400, not including fees). This would leave very little in savings. Take out personal loan next year to fund renovations.
• Remortgage current house to fund purchase of share in mums house plus renovations – mortage £140k over 20 years = repayments of @£650, stepfathers money (£38k) goes back to him and his rent is paid out of that.
• Keep offset mortage on current house and amount in offset account. Raise mortgage on second house of approx. £80k ( on assumed value of about £160k so LTV 50% or so) to fund purchase and repairs – monthly payments could be as little as £186 pm on a cumberland building society 15 yr interest only deal (mums house is in their operating area) or £400 ish on a repayment basis. This would be most expensive option in terms of survey/fees etc

Any advice/insights/reality checks welcome but I’m thinking a decent financial advisor may be the next step to help us decide…..

Lilla_D

Hi, indeed it's a lot of details and nearly enough to give advice, but the caveat is that brokers on this forum are not allowed to give this specific advice. I can see that you've done a lot of research, but as per your last sentence, you will need to speak to a broker outside this forum post in order to get proper help.

getmore4less

You need to do a cash flow analysis of your income to see how much free cashflow you can generate to pay debt.

This will determine some parameters to work on for how much debt time scales and the rates you need to make it happen.

if the SF loan is interest free then keeping that makes a lot of sense.

getmore4less

Summary

buyout of 1/3 share of house No.1
house 1 : Value £168k debt needed £56k
Costs estimate around £3k max
renovations for house 1 £???? (might be around £20k-£25k based on later info)

House 2 : Value £335k debt £57k(100% offset) @ 3.69% 12y full term

Offset funds : cash £19k debt £38k @ ?.? % (assume 0%)
House 2 debt paid by drawdow from offset £580pm ( 98 months)
offset Debt £38k paid £580pm (65months)

Net out from income £580.

savings : £10k (cash ISA)
debts : £11k £200pm (car) WHAT RATE? and term

income 1 : £45k work 49 (rising to £47k)
income 2 : £28k pension 62

Summary of summary.

Total required £56k + £3K + £57k + £25k = £141k
Cash assets £19k + £10k = £29k

4 options considered see post one.

would help to have an idea of max cash from earnings/pension

---

£57k @ 3.69% over 12 years is £490
that means currently overpaying by £90pm + offset funds
with a payment of £580 paid off in 8y 2months
could reduce the payment(from offset) to £396 to preserve cash.

in simple terms you need to raise around £80k-£85k
if Britania will let you do a top up and keep the offset for cashflow

Britania 5y fix 2.09% £85k 12y £668pm

Total interest over 12y £13,600

Stretch to 20y for new borrowings £434pm
Total interest over 20y £19,000

convert the lot £141k @ 2.09 20y £720pm
Total interest over 20y £31,600

converting your current interest free offset pot although costing £580pm to pay back the SD loan it is really cheap money

Is the car loan better than the offset?
if not not sure why you took the loan when you had a 12y flexible loan available @ 3.69%

Can you get a personal loan to fund refurb at a rate better than the offset?
If not probably a good idea to keep it as it is a great cashflow tool.

how much free cashflow you can generate will be the key to the options.

if you can keep finding the interest free SF loan and the additional borrowing once that loan is paid off you will be able to nail the debt fairly quickly

eg if you went for
Stretch to 20y for new borrowings £434pm
Total interest over 20y £19,000

the SF loan is paid off in 65 months if that £580 is diverted to the mortgage that drops the interest down to under £13k and paid off in 11years

zailrand

Thanks Getmore4less - that is really helpful and I'll read in more depth later. One point - car loan is at 3% so took it out as cheaper taking cash out of offset and can be paid off with virtually no penalty at any point (1 month interest if I don't give notice). If I'd have known then we were going to buy mum's house I wouldn't have taken out that loan and would have bought a cheaper car! It's still an option to sell car as it's value is higher than loan amount.

zailrand

That is a really useful summary getmore4less - I'd give you a 2nd thanks if I could!


Just one main query - when you say:


"in simple terms you need to raise around £80k-£85k
if Britania will let you do a top up and keep the offset for cashflow

Britania 5y fix 2.09% £85k 12y £668pm"


Do you mean see if Britainnia will lend additional funds on our current house at a different rate while letting me keep the current offset too (they don't offer the offset product anymore and any additional borrowing would be at 3.69 and not offset) or do you mean take out additional mortgage on mums house?

getmore4less

If you want to keep the current offset and Britannia won't offer competitive extra borrowing then the other house is the only other option.

Refinancing all the debt is the other option if you want to keep it all on one property.

Britannia also have the age issue which you say may give you cashflow problems.

There are other offset providers which may be an option to look at if you like the flexibility of the offset.

An option you may not have considered is do the other owners want the cash up front or would they consider being the lenders?
(if getting on a bit they may not bee keen on 20year term)


It really comes down to how you pay back £80k-£85k + the £38k

As the £38k is already on terms you have the £80k-£85k to play with.