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Let to Buy. does anyone have any advice? need a solid case.

(18 Posts)
Catonkey Sun 14-Apr-13 14:35:59

So for a bit of background info, DO and I live in a 2 bedroom mortgaged home with little equity and no savings (so no deposit) we'd love another baby but realistically need more space first. we have looked into let to buy properties in our area but none of the houses are very nice.

Basically my plan is to get someone to buy a house that we can rent with an agreement to buy in the future.

DPs stepdad is a fairly successful man who already has a couple of rental properties as well as several businesses. A while ago he mentioned to MIL that he was thinking of helping us out with some money every month so that we could pay more off our mortgage.

If he bought a property, we could pay the mortgage (rent) with an extra couple of hundred quid on top, with say 25% to go to him and the rest saved for a "deposit". in, say 5 years time, we take the money we've saved and buy the property from him at its original value. the small amount we could get from the sale of ours (2-3k max after fees etc) could be our initial "deposit" to him. (Basically how I understand rent to buy works)

what I need help with is how to present this to him. the way I see it it's a no lose situation for him, granted he won't make a great deal of money from it but I'm hoping he'll want to help us. what are the legal requirements in regards to contracts etc? are there any down sides/what are the benefits to him?

I'll need to have all the pros and cons before I approach him, so any input appreciated smile

SD

Catonkey Sun 14-Apr-13 14:36:36

sorry for typos, on phone

BoundandRebound Sun 14-Apr-13 14:39:53

Can he not act as your guarantor so you buy it and he avoids the tax issues?

Crutchlow35 Sun 14-Apr-13 14:44:03

What would you do if there is a price crash? You agree a price in 2013 but what happens of there is a crash and the property is worth £30k less in a few years time?

You will then have agreed to buy a property you will never get a mortgage on because a lender will only lend on current value, not what you have agreed with a family member.

Happened to clients at work. It cost them £50k.

Catonkey Sun 14-Apr-13 14:46:21

what tax issues? <thick emoticon> that's the sort of stuff I need help with! thing is we have zero deposit so unlikely to get a mortgage (less than perfect credit rating too) so we'd have to also ask for a sizeable loan for a deposit. thought the buy and let option would be more appealing to him as then he has the security of the property.

Catonkey Sun 14-Apr-13 14:49:51

crutchlow in that case I thought we'd rent until prices pick up again? where I live I'm looking at c.£150k for 3 bedrooms in nice area, would it really be a possibility that prices would fall that far?

Catonkey Sun 14-Apr-13 14:50:39

by that I mean continue to rent from him in the same vein.

Crutchlow35 Sun 14-Apr-13 14:52:35

He will have to pay capital gains tax when he sells the property on.

You are not sounding appealing from a business point of view.

You want a family member to buy a property for you which you may buy in a few years time, you don't have a credit rating, will need a loan for a deposit and that is if you get a mortgage.

Sorry to sound harsh but I don't know how you could make this an appealing proposition.

Crutchlow35 Sun 14-Apr-13 14:55:39

The case at work was extreme. Happened right on the price crash in 2008. There may be a price drop, there may not but even £5k under would still be a lot of money to have to raise to cover it.

HerRoyalNotness Sun 14-Apr-13 14:57:59

I'd be asking that he "loans" the deposit, so he'd put that down and you would apply for the mortgage. Each month you'd pay the mortgage and an amount to him to pay back the deposit. If that makes sense?

First thing would be to check if you have mortgage eligibility and how much you could borrow on your wages and factoring the repayment of the deposit.

Catonkey Sun 14-Apr-13 15:03:03

no my plan is that we build up the deposit with him over the rental period by paying him the extra on top of the rent. as well as whatever we make off ours. We have every intention of buying! part of the problem with our credit rating will be removed from our records within the next couple of years.

basically what this company do. but with SD purchasing a property we like rather than what the company have to offer.

www.nestegghomes.co.uk/nutshell.cfm

flow4 Sun 14-Apr-13 16:32:37

I think your best bet is to be patient and save for the next couple of years while you wait for the 'problems' on your credit records to come off...

It isn't straight-forward or cheap to do a Buy to Let (BTL), and your step-dad would have to want to do you a BIG favour...

Firstly, there are big fees attached to starting up a BTL - around £2-3K, possibly more (depending on circumstances). Do you have this amount saved up, or are you hoping your step-dad would pay the fees for you?

Secondly, there is a maximum 75% loan-to-value on BTL mortgages. The buyer has to contribute at least 25%, and more often 30-35%. This means that if a house is valued at, say £100K, the maximum loan available is £75K. So your step-dad would need a big chunk of capital available.

Thirdly, interest rates are higher on BTLs and there are fewer good 'deals' around. A buyer should expect to be paying 6%+ interest.

Fourthly, mortgage companies insist that the predicted rental income is at least 125% of the mortgage payments. It would not be possible for your step-dad to charge you a low rent that only just covered the mortgage, unless he was making up the shortfall himself.

Fifthly, only mortgage interest is tax deductible on a BTL. If your step-dad took out a repayment mortgage - which you is definitely what you will want if you want to own the house in the end - then he will have to charge enough rent to cover the repayments too, but he will also have to pay tax on the repayment amount. This is not just an extra cost, but also extra admin for him with the Inland Revenue.

Sixthly, as a landlord he would have legal liabilities. Not just your contract rights, but also to maintain and check all gas and electrical appliances, do fire checks, have buildings insurance, etc...

Lastly (I think!), houses have maintenance costs. If the roof falls in or the boiler needs replacing, as your landlord, your step-dad would be legally liable to replace these... He will know that, since he already has other rental properties - and it may explain why he's not keen. The bottom line with 'normal' BTLs is that if they become un-economical, then landlords can sell the house... But you want to keep the house, so you are asking him to carry a lot of ongoing risk.

I'm taking out a BTL myself, because I can't tell my house and it's the only way I can move right now... But I'm pretty certain I wouldn't do it for anyone else!

Viviennemary Sun 14-Apr-13 16:42:25

I don't think this is a very good idea at all. And if houses prices crash then what will hapen. There will be income tax implications and then perhaps capital gains tax to pay if house prices go up. I think flow4 is right.

CandlestickOlder Sun 14-Apr-13 16:46:30

I know this is a radical idea but if you can't afford a bigger place, don't get one. Either make do where you are or sell it and rent.

flow4 Sun 14-Apr-13 17:13:22

I suppose the bottom line is that one needs a minimum 25% deposit for a BTL mortgage, but plenty of normal residential mortgages are available with a 10% deposit.

So if your DP's step-dad has any capital at all, and is willing to help, it would make much more sense for him (i.e. it would be easier, less expensive and carry far less risk) to lend you a 10% deposit in a couple of years when your credit records are 'clear' than to fork out a 25% deposit for a BTL now with all the additional costs and hassle involved.

Catonkey Sun 14-Apr-13 17:59:43

Excellent CandlestickOlder, why didn't I think of that?! FFS of course we know that, selling and renting is pretty much the only way we could get a bigger house (and a garden for DD) I was simply trying to find an alternative solution where we could live in a home we could grow as a family and STAY, as opposed to renting for a few years before moving again.

Catonkey Sun 14-Apr-13 18:02:41

everyone else thanks for your input - I genuinely didn't realise there'd be so many implications for SD as a landlord, especially the different types of mortgage and deposit amounts, let alone tax!

back to the drawing board I guess, appreciate the information.

flow4 Sun 14-Apr-13 20:18:27

This forum on MoneySavingExpert.com is good for info about mortgages, and this one is good for info about house buying/selling/renting generally. smile

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