Interest free bridging loan. Any gotcha's ?!

specialcase83

Hi All,

New to the forum and keen to get stuck in with some much needed insight!

Current concern that I would like to seek views and wisdom on is:

Currently looking to move, we naively put our flat on market late in the day (early July) with the Football and August here, it looks unlikely to sell this season, also similar properties on my road saturating the local market.

We were about thus stop our property search (until we found a buyer, likely to be next year) but viewed a place we had already booked and then really loved it and thought it could be a long term home for us and our 2 young boys, as we are now looking to move out of London and into a hose with garden !!!61514;

To the point - I am in a very fortunate position where parents work abroad and are expats, their home capital be liquid and them not needing it for at least a few years. They are comfortable with providing an interest free bridging loan, to be repaid when we sell our flat, likely next spring/summer when the market picks up.

I spoke to a broker and they suggested with the ‘interest-free’ loan, to clear down my existing mortgage so the flat is discharged and raise a new mortgage on the new house for circa £230K on the house.

Use the rest of interest free loan as a deposit.

From reading up it sounds like it would be beneficial to draft (or get a solicitor, doing the conveyance, to draft) a basic loan agreement, basically stating that it was an interest free loan to remove any tax implications on interest, but more importantly to give parents reassurance as will be a large deposit circa £500K and all parties, inc my wife, to sign. There expectation is that the loan would be repaid on sale of my existing flat.

Doing research online I don’t see any obvious issues/concerns other than;

• Do we put a charge on the new house when registering the property, if we did this then presumably we would need to tell the bank. What would the benefits or considerations be here ?

• Additional SDT - Having to pay additional Stamp Duty Tax at higher rate, this would equate to an additional circa £20K, a total of about £39K SD!! But I understand that I will be able to claim a rebate if i sell my existing home within 36 months

• Capital Gains Tax – I have recently understood from research on line that i may be liable for CGT if I don’t sell my home within 18 months.

I would hope to sell definitely within that time but there is always a small risk. The flat cost with expenses, about £320K and we would be looking to sell between £570 – £600K I have no idea what my exposure would be after 18 months as couldn’t figure out the advice on HMRC.

Am in a potentially great situation but want to ensure there are no other gotchas or risks to consider as i don’t want any risk to my parents capital or my future tax obligations . Obviously it would be better to wait until we sold our flat, but it is likely the place we want will have gone by then and being chain free does seem like a lot less stressful (particularly with a new born and toddler)

We are currently in the offer process on the house, have spoken to broker (who has contacted bank re mortgage ) and have been in contact with potential conveyance solicitors. However I am still a little concern with any more unknowns or risks, e.g could there be implications with the transaction coming in from overseas bank account (UAE) ?

All advice, considerations and views highly appreciated!!

Pixie5740

specialcase83 wrote: »

Hi All,

New to the forum and keen to get stuck in with some much needed insight!

Current concern that I would like to seek views and wisdom on is:

Currently looking to move, we naively put our flat on market late in the day (early July) with the Football and August here, it looks unlikely to sell this season, also similar properties on my road saturating the local market.

We were about thus stop our property search (until we found a buyer, likely to be next year) but viewed a place we had already booked and then really loved it and thought it could be a long term home for us and our 2 young boys, as we are now looking to move out of London and into a hose with garden !!!61514;

To the point - I am in a very fortunate position where parents work abroad and are expats, their home capital be liquid and them not needing it for at least a few years. They are comfortable with providing an interest free bridging loan, to be repaid when we sell our flat, likely next spring/summer when the market picks up.

I spoke to a broker and they suggested with the ‘interest-free’ loan, to clear down my existing mortgage so the flat is discharged and raise a new mortgage on the new house for circa £230K on the house.

Use the rest of interest free loan as a deposit.

From reading up it sounds like it would be beneficial to draft (or get a solicitor, doing the conveyance, to draft) a basic loan agreement, basically stating that it was an interest free loan to remove any tax implications on interest, but more importantly to give parents reassurance as will be a large deposit circa £500K and all parties, inc my wife, to sign. There expectation is that the loan would be repaid on sale of my existing flat.

Doing research online I don’t see any obvious issues/concerns other than;

• Do we put a charge on the new house when registering the property, if we did this then presumably we would need to tell the bank. What would the benefits or considerations be here ?

• Additional SDT - Having to pay additional Stamp Duty Tax at higher rate, this would equate to an additional circa £20K, a total of about £39K SD!! But I understand that I will be able to claim a rebate if i sell my existing home within 36 months

• Capital Gains Tax – I have recently understood from research on line that i may be liable for CGT if I don’t sell my home within 18 months.

I would hope to sell definitely within that time but there is always a small risk. The flat cost with expenses, about £320K and we would be looking to sell between £570 – £600K I have no idea what my exposure would be after 18 months as couldn’t figure out the advice on HMRC.

Am in a potentially great situation but want to ensure there are no other gotchas or risks to consider as i don’t want any risk to my parents capital or my future tax obligations . Obviously it would be better to wait until we sold our flat, but it is likely the place we want will have gone by then and being chain free does seem like a lot less stressful (particularly with a new born and toddler)

We are currently in the offer process on the house, have spoken to broker (who has contacted bank re mortgage ) and have been in contact with potential conveyance solicitors. However I am still a little concern with any more unknowns or risks, e.g could there be implications with the transaction coming in from overseas bank account (UAE) ?

All advice, considerations and views highly appreciated!!

Is the £500k loan only going to clear the mortgage or will you be using some of it as a deposit for the new home? If it will be used as a deposit for the new home that will be an issue for a lot of mortgage lenders. Your broker should be able to advise you about this.

Yes, you will have to pay the higher rate of SDLT but as you correctly say providing you sell your previous main residence within 36 months you can claim back the surcharge.

As it's your current main residence that you'll be selling as long as you sell it relatively quickly as within the timescales for getting a SDLT refund it's unlikely you'll pay any CGT due to PRR. See the CGT calculation for more information:

https://forums.moneysavingexpert.com/showpost.php?p=69071134&postcount=6

As long as your parents can demonstrate the money didn't come from ill-gotten gains there shouldn't be an issue with AML checks.

specialcase83

Thanks Pixie your advice really appreciated

The loan would be for mortgage duscharge and significant deposit (ie my equity of existing flat), but Loan wouldn!!!8217;t necessarily need to have a charge on the house, if that made a difference with mortgage providers ?

Is that something I can influence ?

The repayment term on loan would be solely dependant of sale ofmy existing flat

Tom99

[FONT=Verdana, sans-serif]Your parents could grant you a new mortgage secured on the flat, to be redeemed when sold.[/FONT]
[FONT=Verdana, sans-serif]The problem you will have is getting a mortgage on the new house when you already have a very large liability with the loan/mortgage on the old flat, even if this is interest free.[/FONT]
[FONT=Verdana, sans-serif]Go through a broker to see what they can come up with.[/FONT]

getmore4less

You may be better just reviewing your price a bit.

hoping most on the street has sold and business picks up so you can achieve your price make it he one people want now.

specialcase83

Thanks Tom

The loan would be to pay off my existing mortgage and as a a new deposit. There is enough to cover both.

The loan terms wouldn’t necessarily reference that, or should they? I will speak to broker today to double check that the mortgage lender would be ok with that ( h/w she was the one that recommended this approach instead of a more complicated and riskier one - i.e applying for a Day 1 Remortgage, after flat had sold, to pay back loan, having already purchased new place with cash loan)

Thanks Getmore - I agree that might be a good idea. But flat is already sensibly priced and very happy to reduce asking by £25k , if that motivated buyers, but at the momentI not sure that that will achieve more viewings unfortunately . Particularly in August!

bobobski

Why not sell the flat to your parents and leave it to them to sell it (and you can pay their costs)? They may even prefer to sit on it for the medium term and see an increase in value (hopefully).



Also, Brexit. A bit risky to assume your flat will sell next year at the value you've put on it IMO.

specialcase83

Thanks Boboski

That!!!8217;s not a bad idea, however I have raised it before. They are property investment adverse!

I haven!!!8217;t considered Brexit much tbh, my flat (zone 3 London 3 bed garden maisonette) has already fallen £60-50k over the last 2 years.

Others were pricing higher (25-50) on same road than me this time round. Is there much real risk they will continue to decline ?

foxy-stoat

"Interest free bridging loan. Any gotcha's ?!"

Read that and thought - no such thing as an Interest free Bridging Loan - good luck in your quest !

silvercar

A lot of lenders will have a problem that the deposit on the new purchase is a loan not a gift.

Jane_B

As previous posters have said, using a loan as even part of your deposit will be a big issue for most lenders. They will want your parents to declare the amount used for the deposit as a gift.

The other bits sound reasonable, but its the deposit situation which will be a potential snag. I would ask a broker about it all, as they might have a solution or find a lender that wouldn't have a problem with a loan being used for the full deposit (not likely, but might be possible?)