Help Please, joint ownership and letting.

SIV_2

I feel like my head is going to explode, please advise me.

We were due to exchange contracts on our current house, when at the last minute the buyer pulled out. We really don't want to lose the house we want, plus we have paid fees, searches etc. As our house has been on the market for a while we thought maybe we could let it out. Although we may be able to remortgage to get the deposit for the next house it would be very tight.

However some friend have offered to buy half of our current house. So they would give us 45K, we would remortgae for 50K (that is current amount). The remortgae would cost us £235 a month, with rental estimated at £425-450 a month (split between 2 couples- our married friends and myself and partner). Therefore we would not have to add much to the mortgage and even if was empty we could still afford it.

This would allow us to have 20K deposit, pay of debts and have about 15K left over (so we could if we wanted reduce remortgage amount) and keep some money handy!!

Unfortunatley my family think i am completely mad and have insisted that i will end up in debt and lose everything. i know there is a risk, but surely if i get fixed rate mortgages, how could i lose? Instead of having 1 property i'd have 1 and a half. Any problems with the rental house would be split between us, so less risk.

I bought the potential house for 70K just under 3 years ago, it is now worth 90-95K. Are property prices likely to drop that much?

Also does anyone have any advice on points we need to include on a contract between the 4 of us?

I am very grateful for any advice.

Thanks.

odorus

I did what you are planning to do a year ago.

I remortgaged my flat on a Buy to Let mortgage for a higher amount, took the extra cash and put it down as a deposit on my current place.

Here is my problem. My Management Company have stopped all lettings in our block so now I'm trying to sell it. A year ago it would've gone within a day, now it is getting very little interest.

Your problem is slightly different. As you have a house you won't have my problem of managing agents enforcing tenancy agreements, but it sounds like you are looking for a residential remortgage. If you go down this route and don't tell your bank that you plan to rent the place out they could pull the mortgage on you. They would certainly be within their rights to get you to evict your tenants, and then you would have to pay the mortgage. Look at your small print on your current mortgage, it has a clause about sub letting. The other problem with this route is your bank will look at your earnings and ask how you can afford it, they will also look at the partnership. Usually they will accept up to 4 people on the application and you could put the person with the best wage as the main person.

The better route may be to go through a Buy to let mortgage, as they don't care about your wage. Instead they look at rent. This does present it's own problems. The way they work it out is silly but this is how they do it in a basic form. They times the monthly mortgage that you have asked for by about 1.5 (it varies with banks). If it works out to be more than the rent then you have to increase the deposit. It happened to me this year. BMSolutions had a BTL product with 15% deposit, great I thought. I asked for around £91k, but with a monthly mortgage amount of around £495 it would have meant I needed a rental income of around £740. This wasn't going to happen so I had to increase the deposit. At the moment it's harder to get BTL's than it was a year ago. Banks aren't as keen to lend money for rental properties these days. With BTL's you also don't get fixed rates, the rates track the Bank of England.

Remember that if it becomes a second property you could be liable to capital gains tax and income tax on the rent. As you have lived in it for more than a year you get capital gains tax breaks,if you sell it within 3 years, but your friends wouldn't. So if the place rose in value they would have to pay the appropriate taxes. This information was given to me by my accountant, but as it was a while now I may not have gotton all the facts exactly correct.

Which brings me to the most important thing of all. Get professional advice. Go see a reputable accountant, go see a couple infact. As you don't want to get stuck in a situation that could ultimately screw you up.
I got my mortgage advice through London and Country (I'm not connected with them) thanks to Martin's recommendation. They are really good and will help you through the minefields of the BTL market.

Finally if you rent out you have certain legal responsibilities, and the residual costs could be quite high. Your house might be alright for you to live in but may not meet the PAT test (wiring test) or gas test. In my case I ended up with a bill for around £500 just to get the place earthed and to have a low voltage fan put in the bathroom. You can do this stuff yourself but it still has to be passed by a qualified PAT tester. You should also look at liabilty insurance, so if a tenant trips for example on a loose piece of carpet you are covered if they then sue you.

Sorry this post is so long but letting out a property is a lot more complicated than just advertising your place in the paper. If you plan to do it properly that is. Good Luck

SIV_2

Thanks very much for that, i have managed to get a Buy to let mortgage with Chelsea and have had to change the mortgage i had arranged with Nationwide to Northen Rock. Well I have the provisional ok, just waiting for definate on our friends then i can send them off. So fingers crossed we should be ok.

lush_walrus

Im sorry but I would definately say don't do it. You are about to get tied up in a business arrangement with your friends, letting a house for rent that barely covers the mortgage.

Im not sure what area you are in, but where I am the market is saturated with places to let. If you are close to a Uni, then maybe. But also the landlords responsibilities in letting are changing rapidly in favour of the tennant.

Be very careful if this is the option you are going for, the banks will always lend you the money, but will happily take yuor house away if they lend you more than you can afford.

odorus

To back up what lush walrus says, I would think twice about getting a BTL at the moment. Over the last 5-7 years the world and his wife have jumped onto the BTL band wagon and the market is quite saturated now. Rents have also not gone up at the same rate as house prices. I have found that even in areas like mine where the demand for rental property is higher than the supply that the rental income does not reflect the situation and is still comparatively low.

Conrad

Im a very experienced broker and run my own business. Adding a party to your mortgage and deeds can be extremely complex and such a case rarely suceeds.

There are so many legal and other issues to consider.
I doubt your mortgage application will suceed.

With regard to B2L, Ive sold my portfolio as the market is overcrowded. Many people will get burned.

All sorts of issues (more than u can possibly imagine) will arise with tenants which will put pressure on your relationship with your freind.

If it was me I'd simply sell at a REALISTIC price and set a strict time limit to complete. Realistic means realistic. Any property CORRECTLY priced will immediatley sell. The maket alone determines the price.

Most people over - estimate the value of thier home to others.

Lastly when it comes to investing there is a general consensus that it is best to invest in areas that are unpopular - such that you get in whilst its cheap. UK property is the complete antithesis to this philosophy.