House Conversion Mortgage Rules

MCBifter

I am planning to convert my house (that I live in) to 2 flats. Does anyone know how this will affect my mortgage. I currently have 2 years left on a 4.9% fixed rate mortgage and I obviously do not want to lose this rate. I have a 2% penalty for overpayments this year and 1% next year. The idea is to sell 1 flat and live in the other. Btw the value of the remaining flat should exceed the value of the outstanding debt. :rolleyes: Thanks in advance.

happybroker

Depends on your mortgage terms but you would in all likelyhood need to seek the consent of the lender before making any significant changes to the property and I would be amazed if they would go for this idea.

MCBifter

Thanks for that. Why would the mortgage lender not go for an idea that increased the value of the property by a third? What would they be able to do if I just went and did the conversion and told them afterwards?

Wutang_2

Why??? Have you looked into this at all?

Because it would be a buy-to-let not a residential for a start

Tiddler_2

Well as you will have broken the conditions of the mortgage - then they can force you to pay off the mortgage, withdraw the special rate you have.

In terms of why they wouldn't go for the idea, well your current mortgage is based on the security offered by the full property, and you are changing the security. It may well be that the property will increase in value by having the conversion done, but you will be affecting their risk by making your mortgage a higher proportion of the property value (particularly if you tried to sell the flat - which wouldn't be possible anyway without the mortgage companies approval as you would have to create a title deed for the new flat).

Now if you inform them, and they get it revalued they might (just might) agree to it.

Hope that makes sense!

MCBifter

Hi, thanks for the answers. Spoke to the mortgage company who say they have no problems transfering the mortgage to the larger of the 2 flats as the mortgage value will be only 80% of the value of the flat. I will have to pay for the valuation though.

BTW Wutang in answer to your helpful comments.

"Why??? Have you looked into this at all?"
Obviously I have otherwise I would not have posed the question.

"Because it would be a buy-to-let not a residential for a start."
It would not be a buy to let as I would be living in one flat as my principal primary residence and selling the other therefore not letting any element.
:T

hackneyhouse

This is interesting. Are you still there? See my recent post?

Hello,

I'm tied in for 2 years into existing 230k mortgage on a house valued at 500k.

I am getting planning permission to make into two flats to sell flat 1 and live in flat 2. Flat 1 worth 280k on sale and flat 2 worth 350k.

Therefore I pay off my mortgage. I have a loan from my parents for the conversion.

Problem is I've found out I should tell my mortgage company. Will they say no? Presumably on making a lease the mortgage company finds out anyway. I won't have the capital to pay off existing loan till sale and also very wary of idea of bridging loan.

Worried if I go ahead and build then the mortgage company might cause me problems. Is there any negotiation I can do? When I speak to my conveyancing solicitor what should he do? He suggested writing to my company but I'm worried it'll write off my plans completely.

The whole idea is on sale of the flat I'll pay off mortgage anyway and already face a big redemption penalty anyway. They will make 10k from me.

What do I do? Its difficult getting new mortgage product as I'm self employed and this was originally a self cert mortgage.

Please help.

Thanks!

Helen

Thrugelmir

Read your mortgage contract. The terms on which you were advanced the money originally is quite explicit.

Are you sure you'll clear the mortgage. As the gain made on the second property will be be subject to income tax, your parents will require repayment of the loan for the conversion and the legal fees for drawing up leases and selling the smaller flat will also mount up. Thats not to mention the £10k ERC penalty.

In the meantime you'll need to hope that interest rates don't rise and property prices stall. As I assume that you don't have the capital for this project anyway.

hackneyhouse

thankyou for your advice, really appreciated.

I've fully budgeted, the mortgage will clear as the flat will sell at 280k or I can sell other at 350k or both if I wish. My mortgage is 230k so either way looks good. Its true with 50k profit may not cover all costs and completely pay off my parents loan to build but all the same I'd be looking at a pretty small mortgage if I stayed in one of the flats or paying it off completely.

I will read the contract terms but they must be pretty standard. Property prices are pretty stable in hackney as we are by olympic park and have done homework, demand outstrips supply at the moment. Don't know about interest rates, who knows! want to pay off most of mortgage so not stung that way in future:)

spoke to my accountant, he doesnt think tax will be an issue, I'm doing my homework on that too. capital gains, income tax? how would it work given I live in the property and plan to stay in one flat anyway.

thanks

Heather

Thrugelmir

hackneyhouse wrote: »

thankyou for your advice, really appreciated.

I've fully budgeted, the mortgage will clear as the flat will sell at 280k or I can sell other at 350k or both if I wish. My mortgage is 230k so either way looks good. Its true with 50k profit may not cover all costs and completely pay off my parents loan to build but all the same I'd be looking at a pretty small mortgage if I stayed in one of the flats or paying it off completely.

I will read the contract terms but they must be pretty standard. Property prices are pretty stable in hackney as we are by olympic park and have done homework, demand outstrips supply at the moment. Don't know about interest rates, who knows! want to pay off most of mortgage so not stung that way in future:)

spoke to my accountant, he doesnt think tax will be an issue, I'm doing my homework on that too. capital gains, income tax? how would it work given I live in the property and plan to stay in one flat anyway.

thanks

Heather

If its subject to income tax, which I believe it will, as this is property development. The profit on the 2nd flat will be added to your other earnings and subject to tax. This will clearly take your taxable earnings into the 40% bracket. Hence my observation about the return on the project.

hackneyhouse

strange, my accountant advised me now as I already live in the property and intend to stay there? Therefore it is not property development.