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A topic for discussion from a newbie to the forum...
My husband have started growing a property portfolio. He is still working, I am bringing up our daughter and working on the property portfolio. First flat is purchased and rented out successfully (touch wood!). We have a second flat ready to exchange contracts, we were planning to live in it for a couple of years, then move out of London but keep that flat and rent it out.
We have a residential mortgage arranged on the property. We have been through various hoops in terms of getting quotes and proving we have funds for the work. The mortgage company has now approved our mortgage and we are ready to exchange BUT our plans have changed for personal reasons (baby number 2 on the way!) We would now like to refurbish the flat and rent it out straight away.
The obvious solution is to get a BTL product straight away, I hear you say. Yes, but there are the following sticking points:
1) BTL company may require us to use a light refurbishment mortgage (there is around £20k of work to be done - central heating, kitchen, bathroom, damp and timber treatment, a bit of electrics, decorate everything) - so will require a higher LTV (we are currently on 75:25, I believe refurb mortgages are more like 65:35)
2) We'll have to pay another valuation fee
3) We'll delay by 3-4 weeks whilst the mortgage is sorted
Part of me says just stick with the resi mortgage, tell them once the refurb is done that our circumstances have changed that we want to rent it out. But we're then stuck if they stick to their guns and say no, you have to move in yourselves to satisfy the conditions of the mortgage. We could I suppose then organise a BTL mortgage, but would we fall foul of the 6 month rule, as we'll only have owned the place for 2-3 months? Will a BTL lender lend in this scenario, or will we have to wait until 6 months has elapsed?
So, stick with the resi mortgage and hope things fall into place down the line, or pull the plug on the resi mortgage and sort out the BTL mortgage up front? Any thoughts/advice?
In some ways it is up to you.
Technically nothing has changed yet in your circumstances. You expected to do some work before moving in if I am reading correctly. You could actually live there for a period if that is required.
You do not want to deceive the lender. At the same time the intent when you applied was correct so no foul. Stuff does happen. How you can then adjust your circumstances and your loan agreement are things to handle. It might be best to get the work completed and then see what the options are. That way the place is rent ready, move in read or refinancing ready. More options so you can speak with the lender about what they want to do. They might be happy to give you a year or two before they want you to switch products. Or they might be happy to leave the product in place, more so if they hear the refurbishment has been finished.
The added costs are more or less triggered by your decision to move and to have a child. A new lender would expect a valuation and that is not something any of the parties caused other than you and your husband. In other words, do not let the cost become the reason you try to break the rules. The costs are a speed bump and they might not happen if the current lender is happy to agree with the switch.
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There is an upside to moving in and using the property as your prime residence. When you come to sell, at some future date, you will get excellent tax relief on the capital gain because the property was once your prime residence. I have done this on many properties and I keep good records of the bills, copies of letter sent to me at that address etc so that I can prove that I actually lived there when I want to sell. In fact I have a limited company and I have transfered some of my earlier purchases ( back to the 70's) into that company over the years. In this way I have built up a healthy directors loan account while not paying capital gains tax on the sale of the property to my limited company. I now live in a propety owned by my company and pay tax on the benefit in kind which is financially better than paying rent and the company then paying tax on that income. If I decide to buy another property I will buy it in my own name and live there while I am refurbishing it ready to let and so on.................This can only work if you have no other prime residence in the UK of course and you need to spread the sales/transfers over several years so that it does not appear that your only motive was to avoid capital gains tax.
My lenders are not too concerned when I switch from prime residence to buy to let but I would always tell them - even if they make a charge the end result is worth it.
Thanks for the thoughts so far.
Regarding the tax implications, I am right in thinking that if we sold the property having lived in it, we could pocket the profit without any deductions? If so, how long do you have to have lived in it to qualify? I think I need to get to grips with property tax - can anyone recomend a good starting point!?
You may not keep all of the gain, depending on the increase since you bought, but under current tax rules you will make a substantial tax free gain. You will get the last 3 years gain allowed even if the property has been let for the last three years and there are other allowances you may get for example £40k off the gain. Have a look at these but most accountants will be able to calculate the amount of relief you will get quite simply.