Buying out an ex - Stamp Duty, Mortgage etc

Kiwikind

Hi everyone, hoping someone with a bit more experience can give me a few pointers on my situation. Thank you in advance. I'll try to keep it simple:

- Recently split up with my girlfriend after 7 years together. Completely amicably.
- 5 years ago we bought and moved in to a brand new build 1 bedroom flat for 250K in London. It is leasehold.
- We were fortunate enough not to need a mortgage, and each put in 50% in cash. We paid 2,500 in stamp duty between us.
- We are "tenants in common" for the purposes of the lease.
- She wishes to stay in the flat. I am happy with this arrangement as I would have wanted a bigger place by now anyway.
- Roughly, the property is worth between 380,000 and 400,000 now. Let's say 400,000. So we own about 200k worth each.
- She wants to pay me my 50% value but would need to get a mortgage of some sort to cover it as she can probably only give me 50K of the 200K in cash, max, at the moment.
- If it's relevant, she earns about 26K a year.
- She has no debts and no expenses other than the usual travel, food, utilties, and would be liable for about 1,800 per year in service charge.

So my questions are

1. How would a bank likely approach her situation? She would need to raise 150,000. Do they base it on her earnings? Do they base it on the value of her share, or the whole property? I've heard banks only lend up to 4.5x of one's salary. Not enough in her case. But if the flat is worth 400K, isn't lending her 150,000 a pretty safe bet for them?

2. Stamp duty. Would she need to pay anything just to transfer the property to her name? Please bear in mind there is no mortgage and we legally own 50/50 at the moment.

Thanks everyone.

SDLT_Geek

If she is paying you £200,000 for your share (whether paid all in one go, or spread over time) she will have to pay stamp duty land tax on that payment. Assuming that this is her only property so that the higher rates of SDLT are not due, then the SDLT will be £1,500.


She will not be entitled to first time buyers relief.

00ec25

Kiwikind wrote: »

1. How would a bank likely approach her situation? She would need to raise 150,000. Do they base it on her earnings? Do they base it on the value of her share, or the whole property? I've heard banks only lend up to 4.5x of one's salary. Not enough in her case. But if the flat is worth 400K, isn't lending her 150,000 a pretty safe bet for them?

they base it on whether they think she can afford to repay what she has borrowed . The equity in the flat is irrelevant in that context. Just the same as you cannot borrow £1m if your income is only £10,000

26 x 4.5 = 117 = problem for her

Kiwikind

Thank you both for clear and quick answers. Yes, a problem for her mortgage-wise. And that in turn means a problem for me! It would be heartbreaking for her to have to move away, she moved her life to London to be with me, and we're best of friends. But I can't afford to "sub" her the shortfall as I need my share so I can move on with my own life. Might need to lean on her family I guess.

Still, good news about the stamp duty I guess. Better than the 15K or so I'll need to pay when I buy my own 400K flat!!

*EDIT* The only slight difference I see between this situation and say, asking for a 1M loan when I only earn 10K, is that there is an asset, in the flat, that the banks could seize and sell for 400K, making themselves a tidy profit. Shame that this wouldn't count for anything...

saajan_12

Kiwikind wrote: »

Hi everyone, hoping someone with a bit more experience can give me a few pointers on my situation. Thank you in advance. I'll try to keep it simple:

- Recently split up with my girlfriend after 7 years together. Completely amicably.
- 5 years ago we bought and moved in to a brand new build 1 bedroom flat for 250K in London. It is leasehold.
- We were fortunate enough not to need a mortgage, and each put in 50% in cash. We paid 2,500 in stamp duty between us.
- We are "tenants in common" for the purposes of the lease.
- She wishes to stay in the flat. I am happy with this arrangement as I would have wanted a bigger place by now anyway.
- Roughly, the property is worth between 380,000 and 400,000 now. Let's say 400,000. So we own about 200k worth each.
- She wants to pay me my 50% value but would need to get a mortgage of some sort to cover it as she can probably only give me 50K of the 200K in cash, max, at the moment.
- If it's relevant, she earns about 26K a year.
- She has no debts and no expenses other than the usual travel, food, utilties, and would be liable for about 1,800 per year in service charge.

So my questions are

1. How would a bank likely approach her situation? She would need to raise 150,000. Do they base it on her earnings? Do they base it on the value of her share, or the whole property? I've heard banks only lend up to 4.5x of one's salary. Not enough in her case. But if the flat is worth 400K, isn't lending her 150,000 a pretty safe bet for them?
They base it on the lower of the two:
a) max loan to value ~90% (150k on a 400k house = 37.5% good)
b) max affordable loan ~4.5x salary (150k / 26k = 5.77x salary bad)
Reason being, the property is there as security incase everything goes to pot, which is why they're willing to raise the earnings multiplier (would be lower than 4.5 if there was no security) but they have no interest in actually repossessing the property, as that is very expensive to evict occupants, sell..


2. Stamp duty. Would she need to pay anything just to transfer the property to her name? Please bear in mind there is no mortgage and we legally own 50/50 at the moment.
Mortgage is irrelevant, she's buying your 200k share (whether through a loan or in cash). No first time buyer discount, no higher rate if this is her only property so Stamp duty = 125k @ 0% + 75k @ 2% = £1,500


Thanks everyone.

Kiwikind wrote: »

*EDIT* The only slight difference I see between this situation and say, asking for a 1M loan when I only earn 10K, is that there is an asset, in the flat, that the banks could seize and sell for 400K, making themselves a tidy profit. Shame that this wouldn't count for anything...

It would be the same thing if the 1M loan was secured by the mansion you inherited. With the flat, the bank face costs upfront to
* repossess costing money to evict occupants (get bailiffs, clear rubbish, repair any damage)
* pay estate agents, auction fees etc to sell
* sell property at auction (doesn't always get best market price)

Then any excess they collect over borrower's loan, they repay to borrower - they don't have right to the full security, only the outstanding loan + costs incurred to recover that.

Kiwikind

Understood, thanks. I guess she can appeal to her father for a gift/loan to top up, but he's getting on a bit and no doubt she'll be worried about the 7 year rule regarding inheritance tax. Ah, it's all getting messy! It would be so much neater for me to buy her out, as I can, fortunately, easily afford to buy her share. That's the irony of the situation really, she can't afford to stay in a place we both want her to be in. And if she moves out, she has to move away, out of my life completely which defeats the whole point of us breaking up to be just really close friends!

Guess that's life...

saajan_12

Kiwikind wrote: »

Understood, thanks. I guess she can appeal to her father for a gift/loan to top up, but he's getting on a bit and no doubt she'll be worried about the 7 year rule regarding inheritance tax.

What's the issue with IHT 7 year rule?
If father makes a loan, the value is still part of his estate so no impact on IHT.
If father gifts exgf £x now, then either he survives 7 years so no IHT on £x due, or he doesn't survive 7 years so some IHT due on £x, depending on the value of his estate. If the alternative is exgf inherits that £x then IHT is due on £x depending on the value of his estate. So from an IHT perspective, making a gift now can only be tax beneficial.

The worry is if father ever needs care, and the gift is considered deprivation of assets meaning he has to contribute money which he has gifted away before the state will help.

Kiwikind

saajan_12 wrote: »

What's the issue with IHT 7 year rule?
If father makes a loan, the value is still part of his estate so no impact on IHT.
If father gifts exgf £x now, then either he survives 7 years so no IHT on £x due, or he doesn't survive 7 years so some IHT due on £x, depending on the value of his estate. If the alternative is exgf inherits that £x then IHT is due on £x depending on the value of his estate. So from an IHT perspective, making a gift now can only be tax beneficial.

The worry is if father ever needs care, and the gift is considered deprivation of assets meaning he has to contribute money which he has gifted away before the state will help.

I think the issue is - I've never had to really worry about this "grown up" stuff before until now so am woefully ill-informed about the facts. Total noob in fact! Case in point since writing my previous post I've learned that the potential tax percentage on any inheritance is on a sliding scale so not just a straight 40% on the full amount, if say he only lived 6 years.

I'll do some more reading so as not to make myself look too silly here. I appreciate the tips though everybody. It's a good starting point to at least get my head in the right space. Cheers.

dimbo61

If she can give you £50,000 cash and take out a mortgage of £117,000 you have £167,000.
Now if you sell the property you have selling costs of 2% for the estate agents £8,000 plus VAT so £10,000 and £1/2,000 in legal fees.
Even split 50/50 it will cost you £6,000 at the least.
Could her Dad help with £25/30,000 ?

YoungBlueEyes

A quick Bing search for private mortgages brought up this -
https://www.ghplegal.com/ghp-insights/2009/03/qa-setting-up-a-private-mortgage/
Not exactly the same scenario, but the basics are all there. Would that be a possible solution for you?

Kiwikind

YoungBlueEyes - thanks, I'll look into that!

dimbo61 - I think her dad helping is the only real answer here, short of her having to sell her share to me rather than the other way around, and having to move up north where it's cheaper. Being a veterinary nurse her skills are easily transferable and ironically, she wouldn't be on much less salary per year if she were living in the far north compared to London, whilst the house prices would be significantly cheaper. Financially speaking, the best solution is her move away, absolutely. But on a personal/relationship level (and that's really what life is about) that's the worst thing!

I'll report back, for those that are interested, to let you know how it all goes. Thanks again for advice and pointers.