Question; What is a higher lending charge, and how does it affect me as a borrower?
A higher lending charge is a fee lenders may apply to loans over a certain percentage of a property’s value (or loan-to-value).
For example, a lender may impose an extra charge on borrowers who borrow more than 80% of a property’s value, or perhaps more than 85% etc.
Often the fee will be a percentage of the amount of borrowing that exceeds this threshold.
A typical example would be a 5% charge on all lending over 80% of the property value. In this case, if your home was worth £100,000 and you borrowed £90,000, you would pay 5% of the £10,000 over and above the 80% limit, giving a higher lending charge of £500.
It’s important to consider how the fee is calculated, for each lender. It could be based on the whole loan, meaning the fee could be considerably higher than the example above.
Another important consideration is what the lender does with the fee.
Some lenders charge a fee to increase their profit margin on these loans to cover potential losses if they have to sell properties below market value at auction.
If the lender uses the fee to buy insurance, though, often referred to as a ‘Mortgage Indemnity Guarantee’ (which insures the lender against such losses), in the event of you handing back the keys and the property selling at a loss, the insurer would then have the right to pursue you for their losses under the ‘right of subrogation’.
The FSA forced lenders to stop referring to these charges as ‘Mortgage Indemnity Guarantee’ fees because it was worried that this gave the impression that such insurance policies would benefit the borrower, as well as the lender; so be aware that if you pay this fee or have done in the past, it will not protect you from the lender or insurer pursuing you for any outstanding balances should the property have to be sold at undervalue after repossession.
Capital gains tax is liable for gains made on certain non-exempt sales of assets at a current rate of 18%.
Your main residence is effectively exempt from Capital Gains Tax through tax relief; however, any second home or investment property will become liable for Capital Gains Tax from the date it is no longer your main home.
So if you bought a property as a second home or buy-to-let, then it is liable from the date of purchase; whereas, if you bought a property as your main home and subsequently moved to a new property letting the old one, the old property becomes liable to Capital Gains Tax from the date of transfer.
However, there is a 36-Month leeway given, so you owe Capital Gains tax on the property from 36 Months after its transfer to a buy-to-let.
Losses and expenses are offset against any gain. So keep a record of all your costs as a landlord, including maintenance bills, but not including your mortgage costs (mortgage interest is offset against income tax).
That means it is also worth having some form of valuation on the property at or around its 36th month as a let property to establish the value at its date of becoming liable.
You also have a personal Capital Gains Tax threshold of £10,100 currently, below which no tax is due, so if you are married or in a civil partnership having the property held on a “joint tenancy” or “tenancy in common” basis will allow you to use both your tax thresholds up to £20,200.
To work out any tax owed, take the sale value of the asset, less any costs and applicable tax threshold, and the value at its date of becoming liable, then multiply by 18%.
So if you let a property worth £120K in 2005 and sold it this year for £150K with costs in the four years of £3k, then you would owe £30K less £3K, less £10,100 which = £16,900 taxable gain. Then multiply £16,9K by 18%, giving tax due of £3,042.
In the same situation for a married couple where the property was held in joint names, you would instead take the gain of £30K less £3K costs, and £20,200 tax exemption giving £4,800 taxable and tax owed of £864.
Capital Gains Tax is a complex area, and there are other factors which may affect your tax liability. Remember that taxation policy can change in each government budget.
For more information or to speak to a mortgage broker, call 0345 4594490. Seek independent taxation advice for an exact analysis of your tax liability and guidance on tax mitigation.
Question; I have a joint mortgage currently; we want to change it to being solely in my name or my partners; what do we need to do?
Firstly you need to establish whether your existing mortgage is still within any tie-in period and what penalty for early repayment may apply.
Then you need to check with the lender whether they are happy for the mortgage to transfer to a sole basis, which will mainly come down to their assessment of whether it is affordable to you as a single applicant.
They will re-assess the affordability of the case as if it was a new mortgage. If they are happy you can afford it alone, then the land registry and title will need amendment and a new mortgage contract issued.
That process will require a solicitor or conveyancer to act; you will have to pay for a transfer of equity, usually costing a few hundred pounds.
Depending on the size of the mortgage and the property valuation, it is possible stamp duty may also be chargeable. You should consult your conveyancer on this aspect, as it is a complex field.
However, if the lender is not satisfied the loan is affordable to you alone, they can refuse to remove a party from the loan. That would mean finding a different lender and paying any early repayment penalties to change if a suitable option is available.
If an early repayment penalty is due to end within a few months, you may be able to arrange this as part of a normal remortgage and defer completion until the penalty ends. If it ends more than six months from now, or if you require the release of the other party sooner, you have to pay any applicable penalty.
As well as affordability, the lender will usually re-assess you as a credit risk and possibly the property value.
If you are considering transferring a party from a loan due to bankruptcy proceedings, the solicitors will be made aware of this, and the transfer will not be possible.
As usual, if you need further information about this call 0345 4594490 to speak to a mortgage advisor about your circumstances.
Question; I intend to move out and let my property with a residential mortgage on it; what should I do, and is this ok?
Firstly, it’s a typical condition of almost all residential mortgage contracts that the property is not to be let without the lender’s consent. So you should always speak to your lender first and see what they say.
Most lenders will be relatively helpful with this; there are numerous reasons people choose to let what was once their home, and it’s a common occurrence.
Some lenders may want to change the mortgage contract to a buy-to-let type; others may change nothing until the current mortgage is out of its initial term.
A lender is unlikely to give you a positive response if you only entered into your mortgage contract very recently. If they did, few people would bother paying the higher interest on a buy-to-let mortgage and would take a residential mortgage and switch it a week later.
You will also need to look at your buildings and contents insurance; it will likely invalidate your policy if you are not the primary occupant.
Tenants are more likely to ruin a property than the owner, so your home insurance may be a little more expensive.
You also need to make sure you comply with all the regulations around being a landlord as regards gas inspections and using a secure tenants deposit scheme to avoid any litigation in the future. You should also investigate if any licensing schemes are applicable with your council.
As usual, if you need further information about this call 0345 4594490 to speak to a mortgage advisor about your circumstances.
In Q&A, we take a look at some of the questions mortgage advisers deal with regularly.
Question; what are the pitfalls and benefits of an interest-only mortgage?
They say life is all about risk; this question is a prime example.
If you want the certainty that your mortgage is repaid in full (providing you keep up your payments), then you should take a repayment mortgage.
However, if the cost is too high in the short term, you could take an interest-only mortgage and move to a repayment mortgage later, although you should be aware that the interest paid will be dead money and not reduce your debt.
If you take an interest-only mortgage in the long term, you are gambling that by investing wisely, you can outperform mortgage interest rates with your investments, producing a surplus by the end of the mortgage.
However, if your investment does not perform as planned, there will be a shortfall which you will have to find elsewhere at the end of the term.
But your investment must also outperform mortgage interest rates over the full loan balance; and the entire term.
Whereas if you take a repayment mortgage, the capital part of your payment would gradually reduce the interest element, so like for like, you will repay more interest over the term on an interest-only basis too.
Also, income earned from investments may be subject to further taxation, which increases the risks of shortfalls attached to interest-only loans.
That means interest-only lending on people’s primary residence is considered high risk and is harder to arrange.
On buy-to-let loans, interest only is commonplace. The reduced monthly payments give landlords more breathing space if a tenant fails to pay; allowing for the faster accrual of additional funds for other purchases.
