I was recently approached by a client who had been unable to find a solution to his case with other brokers due to the complex nature of it. Essentially, I was approached to secure an interest only mortgage for a client buying their parents’ house, whilst they continued to reside in it with him.
The property had an interest only mortgage against it which had come to the end of its term and the debt was at a point where it needed to be repaid.
Cost-effectiveness was key in this case as they wanted to minimise the amount of stamp duty required, as well as reduce the deposit. As such, the property – which was valued at £2million – was being sold under value, at £1.4million. This meant the loan needed to be 100% of the transaction price, with the only repayment vehicle the security property.
A further challenge was the parents wishing to stay in the property, as this is something lenders tend to take issue with as it creates legal complications in terms of right to occupy.
Furthermore, my client was a self employed director, whose salary and dividends were significantly lower than company profits.
I recommended a lender who would assess their lending on the open value of the property. The borrowing was effectively 70% loan to value (LTV), which gave the bank comfort on security risk. As there was already equity in the property they did not ask for a further contribution from the client – minimising their costs.
The bank was comfortable with the parents remaining in the property subject to their solicitors confirming they waive their occupancy rights to the property on completion.
The bank assessed affordability based on the strength of the company accounts, taking into account the client’s operating profit. This enabled the client to borrow a higher multiple of his income compared to other banks who would assess affordability on the client’s salary and dividends. This saved the client more money as he did not need to draw out more profits from his company which would have attracted additional higher rate tax.
The bank was comfortable with the sale of the security property as a repayment vehicle due to the property value and equity in the property being sufficient to downsize in the future.
I was able to secure my client a 2-year fixed rate product at a rate of 1.74%.