Second mortgage and use of equity....

wallas74

Hello all, i'd like some advice on buying a house with my girlfriend. I'll keep it brief................... I have a house worth £190k with a £61k mortgage, i'm paying £275 pm for that.
I bought the house from my Mother, she's 80 yrs old and she lives in it and will continue to live there until such time.  Could i use the equity in that house to get a second mortgage with my girlfriend to buy a house for us, we currently rent and our lease runs out at the end of July 2021.
I'm earning £35k and my girlfriend is earning £50k, she currently has £20k for a deposit, and we are both 46 years old.
I will speak to my bank and my current mortgage provider but thought i'd ask here first.

steampowered

You could remortgage your mother's property to raise more funds. However, since you would have "two mortgages", the mortgage on your mother's property would be taken into account when assessing your affordability for the house you want to buy with your girlfriend. 

It might be worth talking to a mortgage who handles second mortgages of second properties. Don't just talk your bank and current mortgage provider - they might not have suitable products, and even if they do they might not be the best value.

Are you on the land register as a co-owner of your mother's property? If so, a property with your girlfriend will be a "second property", so higher rate stamp duty (3% of the value of the property) would be payable. 

wallas74

I’m down as the sole owner of the property my Mother lives in.  

Thank you for your reply. We are in the early stages of thinking about what we will do so I’m just reaching out to get some advice from people like yourself with a bit more knowledge than I. 

steampowered

Ah. In that case you will have to pay higher rate stamp duty. You could avoid higher rate SDLT if the mortgage on your mother's property can be paid off and the property put into your her name, but it doesn't sound like that is possible. 

AdrianC

The only way to free the equity from a property is to mortgage it.

So the £190k property is your mother's home? I presume the lender know that you aren't resident there?

wallas74

AdrianC said:

The only way to free the equity from a property is to mortgage it.

So the £190k property is your mother's home? I presume the lender know that you aren't resident there?

The property was the family home, I bought it eleven years ago and my mother lives in it, I pay the mortgage. 

The lender does not know I haven’t been resident there the last year. 

wallas74

Thanks for your replies. 

wallas74

AdrianC said:

The only way to free the equity from a property is to mortgage it.

So the £190k property is your mother's home? I presume the lender know that you aren't resident there?

What are the implications of myself not living in the property I have a mortgage on ?  I’m not letting it out to rent. 

Would I be able to keep my mortgage on that property and get a new joint mortgage with my partner for a new property for us to live in or would it easier for my partner to get the mortgage solely in her name ? 

Apologies if these questions seem a little basic. 

AdrianC

Read your mortgage paperwork. I'd lay odds on them requiring you to have the place as your primary residence.

And, no, the chances of you getting two residential mortgages simultaneously are very slender, what with it being quite difficult to have two primary residences simultaneously.

Does your mother pay anything at all towards the ownership or maintenance of the property?

wallas74

My mother pays for her bills and we jointly pay for any of the upkeep but it’s in good order so it’s not often. 

I take no rent and I pay the mortgage. 

DairyQueen

Buying a parent's home is fraught with difficulty. The standard advice is: 'don't do it'. HMRC and local authorities are wise to how this has been used as a method of avoiding tax and/or claiming state-funded benefits such as care home fees. The consequences of walking blindly into this financial trap can be serious regardless of whether the motives are well-meaning/innocent.

For you:
- were you a FTB when you bought mum's home? If so, you have now foregone those benefits
- you must pay extra SDLT when purchasing a second property
- you will be liable for CGT on disposal of mum's home as it will not be your primary residence from (officially) the date you purchase the second property
- you will not be able to apply for a standard (i.e. primary residence) mortgage on the home you now wish to buy unless you convert the mortgage on mum's home but...
- you cannot convert the mortgage to, for example, a standard BTL as property occupied by family members is usually excluded and, especially, if occupant is not paying rent
- you could deceive your current mortgagor (not recommended) by applying for a second mortgage on mum's home (if you still claim it as your home) in order to release equity for the second property. However, this would still cause issues with the subsequent mortgage application on property 2 as you cannot have a standard, residential mortgage on two properties concurrently. Finance company would immediately smell a large rat
- if you die mum's home will form part of your estate for IHT calculation
- if you marry and subsequently die/divorce, mum's home will be included in the assets for division on divorce or allocation to heirs/spouse.

For mum:
- if she requires residential care in the future, she will be open to a claim of 'deprivation of assets' if she sold the house to you for less than market value. Did you pay her the full value of her then equity? If not, the LA will treat any equity 'gift' to you as still within her estate and she will be means-tested accordingly. She cannot avoid paying for her own care by gifting all/part of her house
- mum has now foregone the additional IHT relief available for primary residence on death. This is worth £175k if a primary residence is bequeathed to a direct descendant, and possibly double that if your mother is widowed and late husband's allowance was not used on his death
- as mum is not paying rent she has retained beneficial interest in her home and it will still be included in her estate for IHT purposes.

You are now in a difficult situation as you are effectively encumbered by mum's property and this will be a permanent constraint on your finances/life plans.

A possible way forward is for you to continue to claim mum's home as your primary residence. This would require your GF to purchase the new property in her sole name (assuming she can raise sufficient mortgage to do so) but you could contribute toward the deposit (including by extending the mortgage on mum's home). You could then protect your financial interest in GF's home via a 'Declaration of Trust'. There are issues with this approach (including if you/GF marry/split/die) so a solicitor's advice should be sought and s/he should prepare the paperwork - including wills.