Equity release advice

[sg0102]

Hi all,

I'd appreciate some informed advice if anyone is willing to help.

Wife and I are looking at buying a new house for our expanding family. We have seen a house we like, but it needs a bit of renovation work to make it more habitable (vendor is going into a home).

We basically would plan to gut the kitchen and renovate a open plan kitchen diner, redo the bathroom (currently separate WC & bath) and to double glaze throughout. Rought estimates are we would need c.£25k to get this done.

We don't quite have this cash in equity, but are considering borrowing c.£10k from the bank of Mum & Dad. But I want to have a clear plan to pay them back. One of the options I am considering is equity release following the renovation.

My thinking - we buy the property for £200k - spend £25k on renovating, and the property is worth (lets say) £240k. (i think this is prudent). Theoretically, could we remortgage and release the £10k we need to pay the parents back?

The rationale being we only need to increase the value of the house by c.£10k really to pay them back.

We would have alternative plans through my work bonus, shareshave shemes etc, but I would welcome any initial thoughts on if this has any legs??

Many Thanks
Steve

[Sarnie]

Steve,

My first concern would be how accurate your new valuation is going to be. If you purchase the property for £200k, how likely is it that the same lender is going to come out and value it up another £40k, not very in my opinion.

Also, if I'm reading this right, you only have £15k of equity in your current property thus needing to borrow another £10k? Do you have your deposit to purchase the new property separate?

[sg0102]

Thanks Sarnie.

So, a lot of this is all theoretical, but I am working on a basis of purchasing under the asking price, and on the basis of what other properties on the road are advertised at (needing no work) so there is a some judgement being applied.

In terms of cash, we have c.£35k equity in our current house, with about £10k cash - but would need to put down £20k as a deposit, leaving us the £25k (before fees) to spend.

Hope that clarifies.
Cheers
Steve

[blindswelledrat]

When did you get your current mortgage?
Also bear in mind that you really want to aim for at least 20% equity for a mortgage currently in order not to be crippled by mortgage rates.

In theory, what you want to do is entirely feasible
Whether or not you will get the appropriate valuations or a mortgage itself is definitely not a foregone conclusion though.

[Nick Grant]

I'm sure valuation will be a problem. At our last rate negotiation our lenders valued our house at £35K less than our neighbours just sold for, they are building in some fat for protection. I could have appealed but would have had to pay them to come out to view. It made the difference between us haveing 30% equity and 40% equity for the mortgage rates.

[Sarnie]

sg0102 said:

Thanks Sarnie.

So, a lot of this is all theoretical, but I am working on a basis of purchasing under the asking price, and on the basis of what other properties on the road are advertised at (needing no work) so there is a some judgement being applied.

In terms of cash, we have c.£35k equity in our current house, with about £10k cash - but would need to put down £20k as a deposit, leaving us the £25k (before fees) to spend.

Hope that clarifies.
Cheers
Steve

Well, theoretically, your figures fit.

In reality, your going to have a £180k mortgage on a £200k property before the work is done. To get the extra money you won't need to remortgage, your going to need a further advance from your lender to avoid paying the ERC's on your new product. The criteria for Further Advances will still limit you to 90% LTV so your going to need a valuation of £210k+ to get the £10k back out of the property and keeping your total borrowing below the 90% threshold. Also be aware of the reason you would be asking for the money. Some lenders will class you paying your parents back £10k as Debt Consolidation and lenders that do that to 90% nowadays are very few and far between.

If the valuer doesn't agree with your new figures then your stuffed. The only way then would be to wait until your rate expires and move the mortgage to the new lender, borrowing the extra £10k in the process, but this naturally depends on how quick you need to pay back your parents.

[sg0102]

Thanks for all the advice - really appreciated.

My thinking was to have a 2 year mortgage and release the equity on remortgaging; i would anticipate it taking 2 years to fully complete the cosmetic decororating required also.

My parents won't be in a rush to get the cash back; but I don't want to be bleeding them of their retirement money!

Completely understand there are no guarantees etc, and we are looking at other options as well, but it sounds like this "potentially" could have legs, albeit hinges on a lot of things.

[Sarnie]

sg0102 said:

Thanks for all the advice - really appreciated.

My thinking was to have a 2 year mortgage and release the equity on remortgaging; i would anticipate it taking 2 years to fully complete the cosmetic decororating required also.

My parents won't be in a rush to get the cash back; but I don't want to be bleeding them of their retirement money!

Completely understand there are no guarantees etc, and we are looking at other options as well, but it sounds like this "potentially" could have legs, albeit hinges on a lot of things.

On that basis then yes, it's seems to have potential. Just make sure you thoroughly research everything as much as you can. The biggest unknown however is going to be the valuation figure of your first remortgage, ideally you'd want a few sales over the next few years down your street of £210k plus to back up your figures.