Interest-only mortgage for short-term investment & other Q.s

[TheRed]

I've had a look through some of the posts that deal with interest-only mortgages but they don't seem to tackle the following scenario...

-House plus adjoining site with full planning permission for sale in urban area for 420K.
-Strong demand for houses in the area
-I've examined the building drawings used for the planning application, the planning history of the site, the development plan and the planning & development regulations 2001 in detail and am sure that an application to put two houses on the site rather than one would be successful.
-I am a first time buyer and purchasing such a property with such a high price tag is pretty daunting but I am very confident that I'd get an excellent return.
- I have 25K in savings

This is the course of action I'm currently entertaining...

1. Get an interest-only mortgage from the bank, otherwise my repayments would be seriously hefty while I'm developing. I earn about 45K/year gross but work as a contractor, which means no job security. My parents who are asset rich have offered to guarantee the mortage if that will help me get the full amount. They have equity of around a mil.

2. Buy the house and pay the killer stamp duty (really painful) at 4200 @ 6% = 25,200. Hopefully this cost would be covered by the mortgage. I'd pay a lot less stamp duty if I were able to buy the house and the site separately I think??? But the EA says there's plenty of demand for the sale as is. I think the owner just wants to off load the house and site at the same time or else just doesn't want the legal hassle of dividing into 2 lots. There is quite a bit of bidding going on for this property.

3. Apply for planning permission for 2 houses on the site. Once this is obtained, get my solicitor to divide the house and the adjoining site into three lots.

4. Then give the existing house a fresh lick of paint and a good scrub and put it straight back onto the market. Houses in the area are selling quite quickly for around 270K - 315K at the mo. I'm not sure would I have to pay capital gains tax on the sale of the house. Could it be considered my PPR? I don't think I'd make much of a capital gain anyway coz I'd be selling it so quickly after buying it.

4. Hold onto the cash (270-315K) from the sale and use it to finance the construction of the two houses. It should cover the construction & decorating costs and also the development contribution costs to the council for the new houses. I know it looks pretty low but the houses are small.

5. Sell one of the newly constructed houses and pay CGT on it. It should get over the 300K mark. Move into the second house so that it is my PPR

6. Switch to a repayment mortgage, stick the 300K minus CGT into that mortgage. Then my mortgage for my own PPR (which will be worth 300K plus) would should be between 100 to 150K. I'd be delighted with this net result.

I'm aware this is a pretty big undertaking but I'm well up for it. If the worst came to the cost and I didn't get PP, I'd probably still break even or even profit if I sell the existing house and built the one that already has full PP.

Here are my main questions
1. Is an interest-only mortgage the best financing option?
2. Would I get one for 420K on my wage (45K pa contractor) & my parents equity?
3. I presume for the purposes of stamp duty I would just be paying stamp duty of 6% (ftb) on the value of the entire purchase (420K) rather than x% on the value of the existing house when the contracts are signed, and y% on the value of the site plus the building cost (on the residential scale) when the new houses are completed. Is this correct?
4. Would I have to pay CGT on the sale of the existing house or could I count it as my PPR ? If I do have to pay CGT, how would the capital gain be calculated? Would it be:
sale price
less a valuation of the house when I purchased it
less any small bits of decor and cleaning I do b4 selling it
= whatever paltry sum might be left @ 20%
5. Is this a good plan a a crazy idea.

I know this thread is long & drawn-out with question after question after question but any help would be much appreciated to a clueless novice such as myself.

 

[liteweight]

Here are my main questions
1. Is an interest-only mortgage the best financing option?

Yes

2. Would I get one for 420K on my wage (45K pa contractor) & my parents equity?

I seriously doubt it. Lenders normally like you to be in permanent employment plus your salary is quite low in relation to the loan. I don't think the equity in your parents home will be of much value. A lender might suggest that the mortgage be taken out on your parents' home.

3. I presume for the purposes of stamp duty I would just be paying stamp duty of 6% (ftb) on the value of the entire purchase (420K) rather than x% on the value of the existing house when the contracts are signed, and y% on the value of the site plus the building cost (on the residential scale) when the new houses are completed. Is this correct?

Not sure about this, maybe someone else will comment!

4. Would I have to pay CGT on the sale of the existing house or could I count it as my PPR ?

If you move into the house and hold onto it for a while, I think it can be treated as your PPR. However, if you sell it, then build the next two, then sell one etc. Revenue may view this as income and you'd be liable for income tax on the sale proceeds AFAIK.

If I do have to pay CGT, how would the capital gain be calculated? Would it be:
sale price
less a valuation of the house when I purchased it
less any small bits of decor and cleaning I do b4 selling it
= whatever paltry sum might be left @ 20%

Capital Gains Tax:- Sale Price less Purchase Price + costs less 1270 allowance. This figure @ 20%


Can't really comment on whether it's a good plan or not. You should seek independent financial advice. Good luck.

 

[Eurofan]

4. Hold onto the cash (270-315K) from the sale and use it to finance the construction of the two houses.

Am i missing something here or is this a major flaw in the plan?

How can you 'hold onto the cash' when the bank is owed it's mortgage on the house that you're planning on selling?

 

[TheRed]

Thanks for the replies liteweight & eurofan. I'll just pick up on a few points if I may....

I had my doubts that a lending institution would give me such a lsrge mortgage, maybe I could buy jointly with one of my parents, but I'n not sure if either parent would really go for it and I'd also lose the benefits of being ftb. I had thought that maybe if I brought the bank the buildings plans and outlined my budget using a best and worst case scenario they might go for it as a business proposal. Any thoughts on that?

CGT - In terms of calculating CGT on the existing house on the site, the purchase price would be the price I paid for the house and the adjoining site. Would I have to get the existing house valued separately when I buy it or would the purchase price that I paid for the existing house plus site be used to calculate CGT?

Can anyone comment on the stamp duty question?

I think Eurofan may have found a flaw, if I'm transferring the deeds to whoever buys the house I can't have an outstanding mortgage on the property. Is this what you're getting at? If this is the case, I suppose I'd have to re-finance the mortgage, give the 270-315K cash and try and raise a similar amount on the basis of planning permission to construct the 2 houses. Would this work?

 

[TheRed]

I've had a look at another post and realise the CGT query is answered there. Basically it says that when the folio is split, I should have both the site and the existing house valued by an auctioneer and that this figure can be substituted for the purchase price. So that solves that one!

 

[liteweight]

Had another look. If you purchase the entire property then stamp duty is paid on that amount. FTB status is irrelevant here as the price is over the threshold anyway. The only other bonus, if you like, is tax relief at source is greater for a FTB for the first 7 years. This continues to be the case even if you sell on and buy another property.

Eurofan is correct, when you sell the house the mortgage has to be paid off.

 

[Eurofan]

Is this what you're getting at? If this is the case, I suppose I'd have to re-finance the mortgage, give the 270-315K cash and try and raise a similar amount on the basis of planning permission to construct the 2 houses. Would this work?

Very very doubtful, it would have been stretching it to get a mortgage for the house in the first place but i can't imagine a bank financing you with this kind of cash for a new build.

To be honest i really think this is a very high risk plan and you'd do well to give some more thought to how you would cope in the event there were unforeseen problems (i.e. stagnent property market or fall, long delays in build etc. etc.). I don't see that you have any fallback scenario in the event there are difficulties.

 

[TheRed]

Thanks for all the help. Maybe you're right Eurofan and it's just too much of a risk. I'll have a serious think about it and do out some more detailed sums.