How do I fund a property for my dad?

10 July 2014

Q

I'm thinking about buying a second property for my ageing father and stepmother to see out their retirement in, with myself and my husband as owners and my stepmother as the tenant. They both still work and currently rent and despite having some capital to invest, being in their early 60s and not having a great credit history they would struggle to get a mortgage of their own. The property (in a popular retirement town) we are considering costs around £170,000 and we think the mortgage repayments would be around half the rent they currently pay – an amount they could comfortably afford each month, as long as they are working. On my own home, I currently have an outstanding mortgage of around £350,000 and the property is worth around £550,000. Would we be better off using the equity to fund the retirement property or taking out a buy-to-let mortgage?
From
LW/South London

A

There are essentially three different approaches that you could take to achieve your aim.

Firstly it could be possible to take a standard mortgage against the second property. Many lenders will accept this kind of situation where the property is effectively for the use of a dependent relative, even though the owners will not reside in the property. However, lenders will not want there to be any formal tenancy agreement in place.

There is generally a requirement to put down a larger deposit on the property, say 15 to 20% or more. The amount of borrowing available will be based on your income covering the new mortgage as well as the existing mortgage and any other commitments.

The second option is to raise funds against the existing property. Lenders will generally allow a certain level of capital raising against a main residence, typically to 85 to 90% of the property value, to purchase another property. Again, the level of borrowing available will be subject to income covering all commitments and the interest rate will depend on the proportion of the property value being borrowed.

Finally, you could consider buying as a buy-to-let investment. As you will be letting the property to a family member it will, unlike other buy-to-let mortgages, fall under Financial Conduct Authority regulation.

As it is a niche area, most buy-to-let lenders will not offer mortgages on this basis and those that can will often base the lending on your income rather than the potential rental income.

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House prices slow down slightly

Recent changes to mortgage lending rules may have led to a slight slowdown in the housing market. Nationwide revealed that house prices rose by 0.2% in May on average, compared with 1.2% in April – the month new, tough rules for lenders came into play.

As a result of the Mortgage Market Review, lenders must thoroughly examine all of a potential borrower's outgoings before they are approved for a mortgage.

However, the figures revealed that overall prices rose overall by 11.1% in the past 12 months, the fastest increase in seven years.The average UK house price now stands £186,512, higher than the previous peak of October 2007.

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