paulc313

A mortgage to pay a mortgage?

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Hi Everyone,

 

Our current situation is as follows: 

 

  • We currently live in a property worth around 200k and have 110k left to pay on the mortgage so have 80 - 90k to play with if sell
  • We are looking at a plot that costs 95k but think we can get for 85k and my father in law who is a joiner advises that he will build it at cost so he estimates the cost to be £220k for the build
  • We have 35k in savings

 

We have spoken to a self build broker and they advise that taking into account our personal outgoings we would need an extra 20k from somewhere for a self build mortgage to work. My father in law has offered to take this out of his pension and we will then pay him back. He has also spoke about remortgaging his house to help us out. Obviously we are very grateful for these offers. 

 

He's only got a year left on his mortgage and his property is worth 500k. I was wondering if he could potentially remortgage his house rather than us getting a self build mortgage? 

 

If we can go down this road once the build is complete our house would probably be worth around 500k as well with no mortgage. I was thinking we could then get a mortgage on our new build property to pay off his mortgage? Obviously there may be penalties for paying off his mortgage early but I would try to avoid these and potentially get him to go for a  remortgage provider than doesn't have these to avoid them. 

 

Any advice or experience of doing something like this?

 

Thanks

 

Paul

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The risk would appear to be mortgage fraud?

 

You have to say why you want the loan.  To build another house may not be acceptable to the lender.  To tell them something else is mortgage fraud.

 

Withdrawing from a pension may come with a tax liability so that is another cost to factor in.

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I don't see why it would be a problem to remortgage one house to finance a build, you are securing the loan on the building which is standing. People remortgage to invest in their businesses, which is potentially more risky. I would go for it.

 

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We mortgaged our old house solely to help pay the cost of building the new one.  It wasn't a problem for the lender at all, and was a lot more flexible than a self-build mortgage, in that we got all the money upfront.  The interest rate was also lower than for a self-build mortgage.

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26 minutes ago, JSHarris said:

We mortgaged our old house solely to help pay the cost of building the new one.  It wasn't a problem for the lender at all, and was a lot more flexible than a self-build mortgage, in that we got all the money upfront.  The interest rate was also lower than for a self-build mortgage.

 

I assume after moving into the new house it was then a (relatively) simple case of selling the original house to pay off the mortgage on the new one?

 

also given the interest implications, were you able to consider taking the upfront money and offsetting some of the interest of the mortgage against the (decreasing) interest of the loan, were it put into a savings account of some sort? 

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6 minutes ago, Big Neil said:

 

I assume after moving into the new house it was then a (relatively) simple case of selling the original house to pay off the mortgage on the new one?

 

also given the interest implications, were you able to consider taking the upfront money and offsetting some of the interest of the mortgage against the (decreasing) interest of the loan, were it put into a savings account of some sort? 

 

 

Exactly right, on both counts.  We used the money from the sale of the old house to clear the mortgage and we initially had an offset mortgage attached to a savings account, so the interest we paid was just the difference between the mortgage balance and the savings account balance.  This significantly reduced the mortgage payments during the early stages, before we spent all the money.

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3 hours ago, paulc313 said:

Hi Everyone,

 

Our current situation is as follows: 

 

  • We currently live in a property worth around 200k and have 110k left to pay on the mortgage so have 80 - 90k to play with if sell
  • We are looking at a plot that costs 95k but think we can get for 85k and my father in law who is a joiner advises that he will build it at cost so he estimates the cost to be £220k for the build
  • We have 35k in savings

 

We have spoken to a self build broker and they advise that taking into account our personal outgoings we would need an extra 20k from somewhere for a self build mortgage to work. My father in law has offered to take this out of his pension and we will then pay him back. He has also spoke about remortgaging his house to help us out. Obviously we are very grateful for these offers. 

 

He's only got a year left on his mortgage and his property is worth 500k. I was wondering if he could potentially remortgage his house rather than us getting a self build mortgage? 

 

If we can go down this road once the build is complete our house would probably be worth around 500k as well with no mortgage. I was thinking we could then get a mortgage on our new build property to pay off his mortgage? Obviously there may be penalties for paying off his mortgage early but I would try to avoid these and potentially get him to go for a  remortgage provider than doesn't have these to avoid them. 

 

Any advice or experience of doing something like this?

 

Thanks

 

Paul

 

Where in the UK are you building? 

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35 minutes ago, JSHarris said:

Exactly right, on both counts.

 

I wish you were my wife. Were that from her you could replace the Exactly with Absolutely, the Right with Wrong and Both with Every

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3 hours ago, Thedreamer said:

 

Where in the UK are you building? 

Aberdeenshire

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8 hours ago, Big Neil said:

I assume after moving into the new house it was then a (relatively) simple case of selling the original house to pay off the mortgage on the new one?

 

I’m clearly going to side with the wife 😉. I read into @JSHarris’ post that he had borrowed against his old house and not against the new house at all. Thus once he sold the old house he was mortgage free and didn’t ever need a mortgage on the new house. 

 

Remortgaging is clearly easier than getting a self build mortgage but you have to have enough equity in the house plus savings to complete your build otherwise you could end up with a shortfall. That said, rather than borrowing extra, some people live in a static or move in before the build is finished in order to complete the build slowly as and when they can afford it from their earnings. 

 

Remember also that if you want to take out a mortgage on the new house after it is built you will likely need to take out a warranty on the house. 

 

@paulc313 I am a bit confused by your figures. You say you have 90k equity plus 35k savings so 125k of your own once your old house sells. 

 

The plot is 85k and you should be able to build it for 220k. So a total of 305k all in. Does that include all fees, architects, structural engineers, connection of services, site insurance, warranty etc or just the actual build work? 

 

If you put the 35k towards the plot that means that your FIL needs to find 270k to complete the build assuming that you don’t sell straightaway. Would your FIL be able to raise a mortgage of that size? Once you sell that leaves a potential shortfall of 180k that you will need to get a mortgage on the new house for once complete in order to pay off your FIL’s mortgage. Are you proposing to pay your FIL’s mortgage so he doesn’t incur the interest? Would mean you paying 2 mortgages though until you have sold your existing house. 

 

In addition if your FIL is VAT registered he can complete the work on a supply and fit basis with zero vat. If not you will need to buy all materials and reclaim the vat on them meaning that you will need extra cash available until the reclaim is complete to cover the vat on materials. 

 

 

 

 

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Getting a mortgage on an existing house is not necessarily a given at a reasonable rate, no matter the equity if the only way of repaying is your new build.

 

This was the route I took, There was plenty of equity but I had very little income so needed to roll the interest up until the original house was sold.

 

I was only offered 70% loan to value, against their valuation which was 50k less than the Estate Agents valuation.  Valuation fees, arrangement fees and 10 year insurance came to 5k and I was then rolling up 13%annual compound interest.  Plus it was counted as a bridging loan so had it gone over a year there would have been more expense involved.

 

Mine is a small and relatively low cost build, but in 9 months the interest amounted to 10k, (On 100k call down loan) so the whole thing cost 15k (that's 15% of my original build budget) .  Luckily at this stage my sister decided to help me out and loaned me the money to repay and I don't want to think where I would be now if she hadn't, as that was in October, the loan was due to be paid by the end of November and the sale is not yet complete.

 

Cost went at least 50% over budget, time scale more than doubled and I still haven't got the quality of house that I thought I would.

 

I am not regretting doing the self build as I know I would have regretted it if I hadn't done it BUT if I had known then what I know now I wouldn't have.

 

I totally admit my expectations that people would do what they were paid to do and general naivety about the whole project were a big part of the issue.

 

2018 has been by far the most stressful of my life.  I am now comfortable in my new house and, so long as nothing else goes wrong, will in about 3 weeks be able to pay off everything I owe and still have a (very) few thou left over but self build is certainly a big learning curve and one that shouldn't be undertaken without lots of, hopefully unneeded, contingency.

 

 

 

 

 

 

 

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You may already know this but here are some basic principles of mortgages. 

- secured against a house, however, most lender support “cash out” mortgages. Meaning the cash is paid to you and not to another mortgage. That’s how many people fund businesses or buy second homes etc. I took out almost some cash and gave a flimsy reason (I just took the cash as thought I may need some money and was facing redundancy). HSBC said it was for their records of what typical cash out are used for. She was more disappointed I was not doing anything interesting like renovating, getting married or buying a new car. 

- your dad is ultimately responsible for you defaulting, the bank just see his house with equity. He has equity, but the bank will fund ONLY to his retirement age. Equity cash out for pensioners are very expensive and ill advised unless you know what you are doing (reduce inheritance tax etc)

- once built, you can borrow against your property for the same reasons as in point 1

 

Then there is the big BUT.

- Banks with manual underwriting process may take a view and refuse to lend if they don’t like the reasons. 

- if we hit a lending crises at the time of your house being completed. Banks can tighten lending 

- also, if you fall ill, or are out of work, you can’t borrow to repay 

 

60% mortgages are under 1.6% for 2yrs. Self build are 5-6% and only on the drawn amount. You may find the real rate to be circa 3-4% once you are fully drawn 18mths down the line vs a fully drawn mortgage via your dad on day 1

 

If you wanted to be really cold, you could raise the point of asking your parent to advance you your inheritance via an equity release/mortgage option. Then your will need a proper tax lawyer to advise

 

I am just a guy off the internet. 

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“Mortgage fraud “

While a correct term - you are “lieing” to take on debt . We all ‘bend’ the truth sometimes. You are not stealing but bending to borrow .

Doesn’t mean it’s for everyone!

Plenty of people lie to ‘gain’ .

”creative accounting “ is an expression that springs to mind ....

Just my view . 

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My questions would be more fundamental and all to do with risk and family and looking at the potential nightmare scenarios of the kind that you hear about and wonder how on earth someone got themselves into that situation.  These are not questions that I'm expecting you to answer of course - they are quite personal and no offense is intended but the risks you are considering are IMO enormous.

  • Is your wife an only child?
    • If she has siblings, is your FILin a position to offer them the same consideration should they need it?  
    • Are they aware of the situation and if so, are they happy with it?  I know it is his money to do with as he wishes but families fall out over much much less.
  • Is MIL in agreement with these proposals
  • Asuming you are going to be paying 2 mortgages:
    • Can you afford to pay both off at the same time
    • What happens if you or your wife lose your job and you are unable to pay the mortgage on your FIL house.
  • If your FIL is intending to pay his own mortgage, what happens if he loses his job or has an accident and is unable to work?  He could lose his home because he is unable to pay the mortgage - and your build costs have suddenly gone through the roof.

And then the most tricky question of all......... Self build is probably THE most stressful thing most of us will ever do.  It puts enormous strain on the most stable of relationships and getting another family member involved in the financial implications of a self build (even a very loving father with his daughters best interests at heart) make me nervous.

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On 09/03/2019 at 20:28, Sue B said:

My questions would be more fundamental and all to do with risk and family and looking at the potential nightmare scenarios of the kind that you hear about and wonder how on earth someone got themselves into that situation.  These are not questions that I'm expecting you to answer of course - they are quite personal and no offense is intended but the risks you are considering are IMO enormous.

  • Is your wife an only child? Yes she's an only child. 
    • If she has siblings, is your FILin a position to offer them the same consideration should they need it?  
    • Are they aware of the situation and if so, are they happy with it?  I know it is his money to do with as he wishes but families fall out over much much less.
  • Is MIL in agreement with these proposals Not yet. 
  • Asuming you are going to be paying 2 mortgages: 
    • Can you afford to pay both off at the same time Yes. 
    • What happens if you or your wife lose your job and you are unable to pay the mortgage on your FIL house. It's a risk like many other risks in life. 
  • If your FIL is intending to pay his own mortgage, what happens if he loses his job or has an accident and is unable to work?  He could lose his home because he is unable to pay the mortgage - and your build costs have suddenly gone through the roof. I suspect that as he build houses for a living and project manages self builds that he would have insurance if something happened at work for himself. 

And then the most tricky question of all......... Self build is probably THE most stressful thing most of us will ever do.  It puts enormous strain on the most stable of relationships and getting another family member involved in the financial implications of a self build (even a very loving father with his daughters best interests at heart) make me nervous. As I said above, my FIL manages and builds properties for clients as the day job. 

 

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If both the FIL and you will end up with houses worth £500K would they consider gifting you their house? They could remain in residence but you could apply for a new mortgage on their house to finance your build. In the event that they live for seven years, no IHT is payable. There is no SDLT either. If they require Local Authority care they won't need to dispose of the house to fund it.

 

It may be a bit controversial, but I think it may be worth looking at.

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41 minutes ago, Mr Punter said:

 

It may be a bit controversial, but I think it may be worth looking at.

 

No way would I consider this personally. Firstly the house would be building up a CGT liability for the new owner, secondly the new owner could evict me from my own home or sell it without my permission, thirdly if there was a divorce or bankruptcy I may lose my home, and fourthly this may count as a ‘gift with reservation of benefit’ which means that it is treated the same way as if the house had remained in the original owner’s estate so IHT and care home fees will still apply. 

 

I’m sorry to say that I have seen a family ripped apart by this when it sounded like a great thing to do at the start. 

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