My husband wants to...

[40andlovelife]

We bought our house about 14 years ago for £165k and it is now valued at £300k. We owe about £150K on the house still as we remortgaged once.

My husband wants to take £30k out of the value of the house to use as a deposit to buy another house which he plans to rent to a family member. He will pay the excess cost that this puts on the mortgage every month,

Can anyone see any obvious disadvantages to me of this plan?

Yes it's going to firm no from me.

I can see the impact now. I also can't be bothered with my own mortgage becoming messy, life is too short for hassle,

As I have said, his idea has come from a good place.

But as I have told him again and again, no good dead goes unpunished. Something you unfortunately learn as you age!

You are correct, and I have thankfully realised this from reading the replies!

He would be starting a business (being a landlord) which an increasing number of experienced landlords are leaving. With the added complication of a family member as a tenant.

Is he aware of the laws and legislation around renting houses? Are you? It's not just a causal arrangement...

I would be worried that 14 years on, I had not reduced the outstanding principal on the mortgage. You've been lucky that your house has doubled in value since buying but that's unlikely to happen again.

I'd look hard at the numbers and would want to be very sure the rental property stood up financially, assuming whatever rent you plan to charge, reasonable costs and provision for the property being empty for a time.

So probably a no

What is the relation to you and what are their circumstances? It's one thing if it's someone needing a helping hand when starting out, quite another if the person has form for not managing money or their career sensibly or is retired or nearing retirement. Would your DH want the relative to pay a market rent? If he's thinking of making life easier for them by just covering costs he could be setting up a problem whereby they can't afford to move in future.

Also, worst case scenario, your DH dies and you end up having to deal with the rental property. You might consider using an agent to manage, but that's additional cost.

DH is borrowing money to buy an asset

30,000 from current home
300,000 from bank
Other costs funded from savings

New asset needs to be repaid
Bank first 300k
Then your 30k

Proposal is that the asset will generate an income which is taxable

Income:
Tax on income
Bank loan capital + interest(current market rate)
Maintance costs
No profit
No repayment of 30k
No interest rate movement

Family member stops

Income = zero

Dh needs to be able to fund the full loan repayment but cant make any payment at all.

You and DH are still making full payments on home.

Family member needs to be evicted say 2 years of court. Thats if DH is willing to go legal on missed paymemt +1day
Court costs are non-recoverable and need to be paid to solicitor upfront of legal action.
Property recovered and needs to be sold all sale costs need to be paid after the bank gets its 300k
Timing delay for finding buyer and closing out bank loan

House prices may fall as well as rise.

Bank will have started the bad debt process as soon as the first paymemt fails as it is a BTL not a family home. So the expectation is the BTL let contract cashflow transfers from DH to bank
Bank charges for missed payments and legal fees start adding up.

Total owed 330k= price no rise/fall house MV
300k back to bank
XXk to pay for missed payments
Xxk to pay bank recovery costs
YYk to pay for eviction
Yyk to pay sales costs

Not much hope left from your 30k being recoverable more likely that there is an extra loss which you and DH have to cover.

If the sale price is less than what is owed to the bank they will seek to recover the loss/costs from his remaining asset your shared home. The bank could seek to have your house sold. They get their cut, your current bank get their 180 and you and DH get what ever is left after sales costs

@40andlovelife are you on an interest only mortgage or a repayment. Because it very much looks to me the former and if so what that means

Do you know how long… and how much it costs… to evict someone?

He would have to get a buy to let mortgage.
Why does he feel the need to buy a house for someone else?
Having such a small deposit on the second house isn’t a great idea - the interest rate will be higher, your mortgage lending position will be reduced if you ever wanted to move house, and the complications of being a landlord are not to be dismissed. It would be a hard no from me.

Your mortgage will jump considerably and you'll be responsible too for this extra loan. I would avoid doing this, it's not worth it. Unless you have alot of savings, so no borrowing with interest.

I agree that this should be a firm no from you. Can the family member rent somewhere smaller, move to a cheaper area, apply for social housing or live in a retirement flat?

it will be your problem if he won't do it! unless he totally owns the house, anything that goes wrong will be your problem.

@40andlovelife
If the family member has retired, could they get sheltered housing? It would be more secure.
Some areas have housing for rent to those 55+.
Do some research.

Yes I have mentioned this. My own mother lives in sheltered it's fantastic. This is the route they need to go in my opinion

We 'rent' a second property to a family member. Husband bought it for them to live in before we were married. Haven't seen a single penny in rent in over 20 years.
It is in his name solely, and luckily we have paid the mortgage off. If we were ever to divorce though, the equity in it would still go in the marital pot.

It sounds like a terrible idea. Why would you knowingly extend your mortgage? Not once, but twice? It does put you in a precarious position imo.

It’s a non starter really. BTL mortgages have lots of restrictions, and they normally don’t loan above a 70% loan to value, so 30k will not go far. They also want a rent cover ratio usually of 1.5 but this differs by provider. So rent charged must be 1.5 times the mortgage repayment. You say your DH is a higher earner, so he’ll be paying 40% tax on gross rent.

your own mortgage provider will not increase your existing mortgage to invest in another property either, so you’d have to lie about what you wanted to use it for.

your dh obviously thinks it will be much easier than the reality.

tell him to look into it and do a financial appraisal, hopefully he’ll see the numbers simply won’t add up.

It’s a non starter really. BTL mortgages have lots of restrictions

The main one being that you can’t rent to family!!

A higher rate of stamp duty when you buy; punishing capital gains when you sell, and loads on maintenance in between. You’d be mad to go along with this.

If he's planning to leave you then you automatically get half of the equity in the home you live in.
If only he owns the new house then it might not automatically be half yours in the same way. So could be a sensible thing to do if he's planning to leave you, he might even move into the new place