I own two properties and wish to sell one to fund purchasing at auctions.

Posted on 28 September 2007

Hi Katie, complicated one for you....!

I own 2 buy to let properties, and have had enough with being a part time landlord. I have decided to sell one (I would rather keep one, as my pension!) to fund purchasing at auctions to start a career in 'flipping' properties. I will have approx £50k profit when I sell the 1st buy to let, and need to know the best way to finance the auction purchases, at a maximum purchase price of about £150k to start with (£100k loan and my own £50k). (At present, there is approx £70 equity in the 2nd buy to let).

I have been advised to use a bridging loan for the auction purchase, together with my own funds, then change the loan to a buy to let after the initial month (giving me time to renovate). The property will then be at a more affordable interest rate whilst it is up for sale. Firstly, will the buy to let mortgage lenders get wind of this, and stop lending to me if I keep redeeming their mortgages within say 4 months or so?

Secondly, I was advised to obtain a bridging loan as a second charge on my personal property (valued at £370k currently with a £93k repayment mortgage) and ‘draw down the funds’ as and when I need to make an auction purchase - again changing to a buy to let after the initial month?

The latest piece of advise I have been given, is to simply re-mortgage the family home up the maximum salary multiple of around £120k - £150K (my salary is £30k) but with a flexible/CAM mortgage that will allow me to keep my original ‘real’ mortgage of £94k, and leave the balance in the account as a credit, and use the funds to purchase at auction. Thus I will not have increased mortgage payments, until I utilize the extra funds. Upon selling the auction property, I can then repay my CAM mortgage, and again leave the extra funds in the account ready for the next purchase. Again, I am not sure how the lenders will see this, or if it is legal? Also, will I gain tax relief on the interest portion of the mortgage, as technically, the mortgage will be on my personal residence?

Please please help!

Hi Stuart,

That's OK, not as complicated as you may think.  The plan is sound,  just be aware of the panic and hard work involved in buying through auctions.  The 28 day limit for completion is normally what gives people problems, and the secret is to always have your finance secured (as best you can) before you bid.

Yes some lenders will not be happy that you redeem immediately.  Don't forget that you are advising them that you intend to let the property (this is how you are claiming to make the mortgage payments) so if you sell within six months you clearly never let it.  Realistically, they would not tell each other: early repayment is not, I believe, registered on the Hunter system, (which is where they record fraudulent applications for each other).  However they would have you on your records for next time and there are only so many you can switch between.  But the main reason you can't go down that route is that it is fraudulent to apply for a buy-to-let, with no intention to let.

Bridging loans are costly and often take as long to arrange as a buy to let mortgage, because, whist a valuation may not be done, your own income needs to be proven as watertight. Also the rates are not competitive at all.  I don't see that option 2 puts you in any better position.

I really love the idea of the current account mortgage. Yes, this is absolutely legal, and exactly the sort of venture that offsets are for. If you can muster enough cash in the reserve then this is the best plan.   If you borrowed up to £150,000, and your real mortgage is £94,000, you are still only generating £56,000 to play with.  Add this to the £50,000 from selling the first BTL and you have £106,000 so you are short of the rest.  I would consider remortgaging the second BTL to as high as you can get it in order to fund that shortfall of £44,000.

Whilst it is much easier for tax purposes to have a simple buy-to-let mortgage, I have had clients before who were successfully claiming relief on the capital that they raised from their own homes to put towards the buy-to-let, as well as the interest from the actual buy-to-let itself.  Although saying that, they were actually letting the property.  Whether you can claim tax relief on a quickly turned-around commercial venture such as this is another matter and one which, i'm afraid, you will have to refer to an accountant.

Katie.

Category: Overpayments, Payment Holdays, underpayments, Borrowback, Second properties

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