Buying friend out of shared flat
Discussion
A mate and I jointly own a flat, which is currently rented. It's in SE16, a nice block on the river, and the other party needs to get some money out of it to buy his own place to live.
Our options are:
- straight sale on the market
- one of us buys the other out (if he bought it, he would therefore live in it again)
- remortgage to extract some capital
He has a strong preference to buying me out, because he will only be paying stamp duty on his half, saving a decent chunk vs buying an equivalent flat.
I get the general idea of how this would work, but I'm not clear on some of the detail. I'm even considering if I could buy him out instead and keep it rented out. I assume I end up remortgaging for the entire outstanding balance of the existing mortgage plus his share of the gain? Or do I remortgage for only my half of the existing mortgage and expect him to pay his half off out of the balance I send him?
If I sold it to him we could avoid estate agent fees, therefore we could transfer ownership at a slightly lower price compared to the market but with the same proceeds in my pocket and a lower mortgage for him.
Some numbers (slightly fictitious)... purchased for £300k, £200k outstanding mortgage, £700k value now.
What would you do? Are we mad to be considering selling a flat in a booming market or is now a good time to take profit before the bubble bursts?
Our options are:
- straight sale on the market
- one of us buys the other out (if he bought it, he would therefore live in it again)
- remortgage to extract some capital
He has a strong preference to buying me out, because he will only be paying stamp duty on his half, saving a decent chunk vs buying an equivalent flat.
I get the general idea of how this would work, but I'm not clear on some of the detail. I'm even considering if I could buy him out instead and keep it rented out. I assume I end up remortgaging for the entire outstanding balance of the existing mortgage plus his share of the gain? Or do I remortgage for only my half of the existing mortgage and expect him to pay his half off out of the balance I send him?
If I sold it to him we could avoid estate agent fees, therefore we could transfer ownership at a slightly lower price compared to the market but with the same proceeds in my pocket and a lower mortgage for him.
Some numbers (slightly fictitious)... purchased for £300k, £200k outstanding mortgage, £700k value now.
What would you do? Are we mad to be considering selling a flat in a booming market or is now a good time to take profit before the bubble bursts?
Sarnie said:
How much is the rent?
It's still on a normal repayment mortgage with permission to let from our current lender. There is a fairly chunky service charge as well, and the rent covers the whole lot but with nothing spare. In other words we don't end up with any income from this, but the mortgage balance is going down each month. The tenants are on an 18 month contract but with a 9 month break clause which is coming up.TallMark said:
It's still on a normal repayment mortgage with permission to let from our current lender. There is a fairly chunky service charge as well, and the rent covers the whole lot but with nothing spare. In other words we don't end up with any income from this, but the mortgage balance is going down each month. The tenants are on an 18 month contract but with a 9 month break clause which is coming up.
Ok, but how much is the rent?In which case if you are ostensibly buying your mate's share out on a residential basis, you will need to pass residential affordability tests. Using your figures there is £500k of equity in it, half of which belongs to your mate, so you need to raise £250k on top of the £200k. Would your income support a mortgage of £450k? In addition to whatever it is costing you to rent/buy where you currently live?
Of course the lender might use this as an opportunity to force a change to BTL.
Given the return I think I would be looking at the price curve and asking myself when is enough enough? Getting off this particular bus could prove to be a very shrewd move, there are all sorts of bubbly indicators out there that suggest this market is ripe to overheat.
What does it yield in BTL terms? Another good indicator of value over price.
Of course the lender might use this as an opportunity to force a change to BTL.
Given the return I think I would be looking at the price curve and asking myself when is enough enough? Getting off this particular bus could prove to be a very shrewd move, there are all sorts of bubbly indicators out there that suggest this market is ripe to overheat.
What does it yield in BTL terms? Another good indicator of value over price.
z4chris99 said:
i would be selling between now and the election.
this london market is bubblier than a bubbly thing.
true perhaps, but if he is going to buy a flat with the proceeds anyway, unless he rents in the meantime he won't be able to take advantage of any post-election situation.this london market is bubblier than a bubbly thing.
cheapest solution would be to transfer entire property to either party - obviously they will need to decide on a price and who wants the flat more ..
actually, I see your point - get rid of it now in a booming market and you can both buy something better.
pacoryan said:
In which case if you are ostensibly buying your mate's share out on a residential basis, you will need to pass residential affordability tests. Using your figures there is £500k of equity in it, half of which belongs to your mate, so you need to raise £250k on top of the £200k. Would your income support a mortgage of £450k? In addition to whatever it is costing you to rent/buy where you currently live?
If I bought his share I wouldn't be able to afford both as residential, at least not without ploughing a big deposit in out of my savings which I'd prefer not to do, so I was hoping to use a BTL mortgage on an interest only. Do you think I *have* to use a residential then?Using my example numbers above, I assumed that as we both had £250k of equity in the flat, when I remortgaged I would be using that as my deposit and borrowing £450k so I could pay off firstly the old mortgage and secondly his share of equity.
pacoryan said:
Given the return I think I would be looking at the price curve and asking myself when is enough enough? Getting off this particular bus could prove to be a very shrewd move, there are all sorts of bubbly indicators out there that suggest this market is ripe to overheat.
What does it yield in BTL terms? Another good indicator of value over price.
A quick search shows the BTL mortgage would be around £1300-1400, so would yield a couple of hundred per month.What does it yield in BTL terms? Another good indicator of value over price.
One more thing... the estate agents we've had round have told us there is a massive disconnect right now between what they feel the flats are worth, and what people are actually offering.
This indicates to me that now's the right time to sell. I'll just be kicking myself if it kept rising... I mean an extra 10% on 700k is a fair chunk. This flat is worth a lot more than the house that I actually live in, and which is outside london and not growing at the same rate for example.
This indicates to me that now's the right time to sell. I'll just be kicking myself if it kept rising... I mean an extra 10% on 700k is a fair chunk. This flat is worth a lot more than the house that I actually live in, and which is outside london and not growing at the same rate for example.
t may or may not start happening. TallMark said:
I didn't quote it because my figures above are not 100% accurate either.
Rent is £2275, mortgage is £1615 and service charge/ground rent is £550.
Thanks for that.Rent is £2275, mortgage is £1615 and service charge/ground rent is £550.
The reason why I was asking was to find out if lending the full £450k on a BTL basis was going to be possible. You'd have to be earning some healthy figures to be able to secure a £450k mortgage as a second residential property basis.
On a BTL basis you wouldn't be a million miles away though. This is how a BTL lender would assess the application.
£450,000 x 5% (nominal stress rate most lenders use)
= £22,500 annual interest.
£22,500 / 12 = £1,875 per month interest
£1,875 x 125% = £2,343 minimum rent you'd need to be receiving to borrow £450k on a BTL basis.
Working the figures backwards from your rental figure the max lend would be £436,800.
Hope that helps?
TallMark said:
pacoryan said:
3.9% gross yield? With some punchy overheads to subtract as well. Good indicator that the value is close to its peak IMHO, not a bad time to jump.
Don't forget thats a repayment mortgage though, so its paying ~£500 off the balance each month too.On your prior point about BTL, I was assuming you were hoping to keep the current mortgage and just transfer it to you - which I was hinting might be difficult.
A BTL mortgage will be a walk in the park to obtain on the figs suggested, I would suggest keeping it Interest Only and using any surplus income to reduce a residential mortgage first (assuming you buy something else to live in) and have as much borrowing as is practical on the BTL as opposed to the residential mortgage. This way you can off-set as much interest as possible against the surplus rental income and reduce your tax exposure.
ETA Sarnie's done the maths I see, on a cautious approach which is wise, a little legwork should see that loan squeezed up. Just for clarity you said the service charge/ground rent was "chunky" - was that an annual figure you quoted?
Edited by pacoryan on Wednesday 2nd April 14:35
Edited by pacoryan on Wednesday 2nd April 14:44
Edited by pacoryan on Wednesday 2nd April 14:46
pacoryan said:
Ah yes that's a fair point, that bumps up your gross yield nicely to the high 4's.
On your prior point about BTL, I was assuming you were hoping to keep the current mortgage and just transfer it to you - which I was hinting might be difficult.
A BTL mortgage will be a walk in the park to obtain on the figs suggested, I would suggest keeping it Interest Only and using any surplus income to reduce a residential mortgage first (assuming you buy something else to live in) and have as much borrowing as is practical on the BTL as opposed to the residential mortgage. This way you can off-set as much interest as possible against the surplus rental income and reduce your tax exposure.
ETA Sarnie's done the maths I see, on a cautious approach which is wise, a little legwork should see that loan squeezed up. Just for clarity you said the service charge/ground rent was "chunky" - was that an annual figure you quoted?
The only cautious part of it is the 5% stress rate which is what most lenders use, some are higher. If a higher borrowing figure is required there are one or two lenders that will use the pay rate rather than the 5%, which if it is less than 5% will result in a higher borrowing figure. Natwest's used to be 7% until late last year!!On your prior point about BTL, I was assuming you were hoping to keep the current mortgage and just transfer it to you - which I was hinting might be difficult.
A BTL mortgage will be a walk in the park to obtain on the figs suggested, I would suggest keeping it Interest Only and using any surplus income to reduce a residential mortgage first (assuming you buy something else to live in) and have as much borrowing as is practical on the BTL as opposed to the residential mortgage. This way you can off-set as much interest as possible against the surplus rental income and reduce your tax exposure.
ETA Sarnie's done the maths I see, on a cautious approach which is wise, a little legwork should see that loan squeezed up. Just for clarity you said the service charge/ground rent was "chunky" - was that an annual figure you quoted?
Edited by pacoryan on Wednesday 2nd April 14:35
Edited by pacoryan on Wednesday 2nd April 14:44
Edited by pacoryan on Wednesday 2nd April 14:46
You may even get a lender two who will only require 100% coverage of the rental if it's in the right area....eg within the M25 etc.
pacoryan said:
Just for clarity you said the service charge/ground rent was "chunky" - was that an annual figure you quoted?
No, its about £6500 per year (swimming pool, sauna, 24h porter, lifts, etc)Thank you guys very much for the info so far, the option of me buying it is much clearer now but I suspect I won't take that option given the potential squeeze on the figures.
So, if anyone's still reading, now a question about the best way for me to sell...
If we sell it on the open market, for 700k, then we've each made a capital gain of £200k. On which I'd need to pay 28% tax (=£56k), but we believe my mate wouldn't need to pay ANY because he's lived in it within the last 3 years.
Now if I sold it to him instead, is there any way we could structure it to reduce my capital gains liability or otherwise increase the amount I received (legally of course)?
Sarnie said:
pacoryan said:
Ah yes that's a fair point, that bumps up your gross yield nicely to the high 4's.
On your prior point about BTL, I was assuming you were hoping to keep the current mortgage and just transfer it to you - which I was hinting might be difficult.
A BTL mortgage will be a walk in the park to obtain on the figs suggested, I would suggest keeping it Interest Only and using any surplus income to reduce a residential mortgage first (assuming you buy something else to live in) and have as much borrowing as is practical on the BTL as opposed to the residential mortgage. This way you can off-set as much interest as possible against the surplus rental income and reduce your tax exposure.
ETA Sarnie's done the maths I see, on a cautious approach which is wise, a little legwork should see that loan squeezed up. Just for clarity you said the service charge/ground rent was "chunky" - was that an annual figure you quoted?
The only cautious part of it is the 5% stress rate which is what most lenders use, some are higher. If a higher borrowing figure is required there are one or two lenders that will use the pay rate rather than the 5%, which if it is less than 5% will result in a higher borrowing figure. Natwest's used to be 7% until late last year!!On your prior point about BTL, I was assuming you were hoping to keep the current mortgage and just transfer it to you - which I was hinting might be difficult.
A BTL mortgage will be a walk in the park to obtain on the figs suggested, I would suggest keeping it Interest Only and using any surplus income to reduce a residential mortgage first (assuming you buy something else to live in) and have as much borrowing as is practical on the BTL as opposed to the residential mortgage. This way you can off-set as much interest as possible against the surplus rental income and reduce your tax exposure.
ETA Sarnie's done the maths I see, on a cautious approach which is wise, a little legwork should see that loan squeezed up. Just for clarity you said the service charge/ground rent was "chunky" - was that an annual figure you quoted?
Edited by pacoryan on Wednesday 2nd April 14:35
Edited by pacoryan on Wednesday 2nd April 14:44
Edited by pacoryan on Wednesday 2nd April 14:46
You may even get a lender two who will only require 100% coverage of the rental if it's in the right area....eg within the M25 etc.
However as the OP has now confirmed the service charge is monthly it may scupper any BTL plans further because the lender will probably discount this from the rental income before assessing rental cover.
TallMark said:
...
So, if anyone's still reading, now a question about the best way for me to sell...
If we sell it on the open market, for 700k, then we've each made a capital gain of £200k. On which I'd need to pay 28% tax (=£56k), but we believe my mate wouldn't need to pay ANY because he's lived in it within the last 3 years.
Now if I sold it to him instead, is there any way we could structure it to reduce my capital gains liability or otherwise increase the amount I received (legally of course)?
TallMark, did you ever live there? Do you live somewhere else on which you might claim Private Residence Relief? You might still be eligible for Letting Relief of up to £40k reducing your gain to £160k, minus your allowance of course. A few ifs, buts and maybes are involved in the detail though.So, if anyone's still reading, now a question about the best way for me to sell...
If we sell it on the open market, for 700k, then we've each made a capital gain of £200k. On which I'd need to pay 28% tax (=£56k), but we believe my mate wouldn't need to pay ANY because he's lived in it within the last 3 years.
Now if I sold it to him instead, is there any way we could structure it to reduce my capital gains liability or otherwise increase the amount I received (legally of course)?
Edit: and when did you both buy it in the first place?
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