Could someone explain how a house purchase allowance works please?

Asiam786

Hi all. Hope somebody can help

We're very close to completion on our new property. 
Intially we agreed to 507,000 but have managed to get it reduced by £4000. 

Now the solicitor has said she has informed our mortgage lender (barclays) of this allowance, and if they are okay with it, we will complete. 

Can 4k cause an issue? Im really dreading going through another mortgage application (terrified) as we may lose the house its been over 5 months and vendors getting tetchy. 

We put down over 25% so are borrowing around 380,000. 

Any help would be great. 

K_S

@asiam786 I'm not sure what exactly you mean by 'house purchase allowance', but I'm assuming it's just a renegotiated purchase price that is now 503k instead of the initial agreed price of 507k.

Assuming your loan size of 380k is unchanged, your original LTV (purchase price of 507k) would have been just under 75% LTV and your new LTV would be just over 75% LTV. Worst case scenario if Barclays says that the current product is not applicable because you've gone above 75% LTV,  you may have to reduce the loan size slightly to keep within the 75% LTV band.

Asiam786 said:

Hi all. Hope somebody can help

We're very close to completion on our new property. 
Intially we agreed to 507,000 but have managed to get it reduced by £4000. 

Now the solicitor has said she has informed our mortgage lender (barclays) of this allowance, and if they are okay with it, we will complete. 

Can 4k cause an issue? Im really dreading going through another mortgage application (terrified) as we may lose the house its been over 5 months and vendors getting tetchy. 

We put down over 25% so are borrowing around 380,000. 

Any help would be great. 

Asiam786

Thanks so much @K_S. 

Can you pls explain the LVT? I'm totally thick when it comes to jargon. Is what youre saying that because we're getting a reduction in price, we are borrowing less? So worst case...? Sorry!

housebuyer143

Asiam786 said:

Thanks so much @K_S. 

Can you pls explain the LVT? I'm totally thick when it comes to jargon. Is what youre saying that because we're getting a reduction in price, we are borrowing less? So worst case...? Sorry!

You are paying less now and because of this the property value is less in their eyes. So your LTV will now change. If it puts you over the 75% LTV bracket changes are they are not likely going to honour the current rate and you will have to pick a new one (on the higher interest rates).
If this happens you will need to put in additional deposit and take a lower loan from them to get you back under the right LTV threshold. 

Annisele

The "V" in Loan To Value is usually the lower of the price the surveyor valued the property at and the price you actually pay.

So, assuming no downvaluations, if you'd paid £507k and borrowed £380k then your LTV would be 380/507 = 74.9%.

If you pay £503k and borrow £380k, then your LTV would be 380/503 = 75.5%.

If your mortgage product assumes 75% LTV - or, in other words, if your lender assumed you'd be putting up a depost of 25% of the purchase price - then you now have a problem. You either choose a different mortgage product, or (if you can afford it), you borrow only £377,250 and come up with the extra £2,750 from your own resources (not by borrowing it - that causes other issues!).

Asiam786

Thanks @Annisele. But we'd still be borrowing 507, its just that we would give the vendor 503 and take 4k cash from the funds? 

housebuyer143

Asiam786 said:

Thanks @Annisele. But we'd still be borrowing 507, its just that we would give the vendor 503 and take 4k cash from the funds? 

No, you can't do that.. The bank will not lend you more than you are paying. By lowering the amount you are buying the house for, you have now altered the value of the house. This is why getting reductions is risky as now you are back to "will I or won't I get the mortgage offer on that rate". 

You were better off paying £507 for the house and asking for the £4k in cash at completion from the seller.

Asiam786

@Annisele hmmm ok. Thats odd because thats what I think our solicitor is doing? She's informed the bank...

housebuyer143

Asiam786 said:

@Annisele hmmm ok. Thats odd because thats what I think our solicitor is doing? She's informed the bank...

Yes, she is required to advise the bank of the change in purchase price. 

Annisele

Asiam786 said:

Thanks @Annisele. But we'd still be borrowing 507, its just that we would give the vendor 503 and take 4k cash from the funds? 

It doesn't sound as though you ever planned to borrow £507k - didn't you say your original plan was to borrow £380k?

If the mortgage product you've got is one that's OK with a 75.5% LTV, eg it's an 80% LTV product, then there's no problem and you'll still be able to borrow £380k and spend £4k less of your own funds. But if the product you've got is a 75% LTV product, you won't be able to borrow £380k on that mortgage product.

london21

Asiam786 said:

Thanks @Annisele. But we'd still be borrowing 507, its just that we would give the vendor 503 and take 4k cash from the funds? 

It does not work like that.

The bank will lend you 75% of the purchase price 75% of 503k = £377,250

so the cash you will be left with from the savings will not be £4000 but 25% of it = £1000
the remaining savings is from your mortgage amount so instead of borrowing £380,250 you are now borrowing £377,250. £3000 savings.

If the product you are going for is 75% you must stay within it, can be less but not more.