Slightly unusual situation, loan and mortgage application.

We are currently finalising plans for a planning application for a self build on a site on the family farm. My wife is on maternity leave until the end of the year (statutory only as her previous contact ended prior to going on maternity) but despite this we are keeping up decent savings (around 900 incl the child benefit) and paying a mortgage on current house.

Deposit is more than sorted already, we won’t be using all of it for the house by any means but we have around 100k in savings/investments plus should net around 25k from sale of current house.

We can’t really apply for the mortgage until my wife is back working as I won’t be able to borrow enough on my income alone (very much need 3.5 times two salaries). We would be looking to borrow around 300k at a guess which we will be just about doable on the 3.5 times my salary and the expected salary my wife will be on.

The complication has arisen that some land has come up for sale adjacent to our family farm and we are very interested in purchasing it. Having thought it through there would be advantages for me to buy it in my name. I won’t go into details as it would be long winded but it would be good to get started with stuff in my name (I will be inheriting the full farm eventually) and there is basically incentives and additional grants etc available for young farmers that would make reclaiming the land cheaper etc.

So what was suggested was I get a loan and buy the land (it would be around 50k) in my name but my parents would be actually paying the loan (structured in a way to take full advantage of the small gifts exemption between my parents and my wife and I so not as to use any Group A threashold).

I’m really just wondering how badly will having this loan impact on a mortgage application next year (I have a feeling it will mess it all up). I know it’s always said to clear debt but it’s usually people with credit card debit or car loans not for land. Are they very reluctant to even consider giving mortgages to those with a hefty enough loan, I’m not sure will I be able to class it as a business loan or if it would be personal? Also it will be fairly obvious when they look at finances that I’m not actually paying it at all but I know it’s very very unlikely they will consider this so the reality is they will be looking at me as having the loan repayments and a dependent (our child). It’s possible but unlikely that there will be any income from this piece of land in time for the mortgage application.

Anyway I know it’s a long post and not really any clear question in there but just wanted to start a bit of a conversation on things to see what are the pitfalls here. Basically is a mortgage of 300k, loan of 50k and childcare (though that would be too bad given it will be rural and not everyday) an impossibility?

Would you not use savings to buy the land?a loan will massively affect the amount you can borrow. Easier that way if it's possible

I'm confused why your parents don't buy it and put in your name if they are going to be repaying the loan? Yes this will impact your Inheritance figure but they can still give you and your wife a tax free 12k a year combined. That figure will increase by 6k a year for every child

Of course a 50k loan will have an impact on your borrowing capacity for mortgage purposes.

luckystar said:

Would you not use savings to buy the land?a loan will massively affect the amount you can borrow. Easier that way if it's possible

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Definitely not an option using savings, I need most of what is easily accessible for the house and the rest is invested that I don’t want touching. That 50k would take a very very long time to get back from the farm, I wouldn’t consider buying the land a great investment any time soon but in the very long run it will be good to have more land on the farm. It’s also just something we want to do aside from the financials.

In any case we try to avoid if at all possible using off farm income for the farm so the loan would be repaid out of farm income not mine or my parents off farm income or savings (they could also buy it for cash but again don’t want using their off farm savings in this way).

Easel said:

I'm confused why your parents don't buy it and put in your name if they are going to be repaying the loan? Yes this will impact your Inheritance figure but they can still give you and your wife a tax free 12k a year combined. That figure will increase by 6k a year for every child

Of course a 50k loan will have an impact on your borrowing capacity for mortgage purposes.

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We will have to look into this possibility a bit more but it has potential consequences like reduction in life time threashold and there will be future need for it but how much of it depends on different factors (some outside our control like the valuation of the farm for tax purpose in future (though it will be reduced by 90% as I qualify for agri relief).

I’m only starting to look into this option also and their maybe some other issues also with this method but it is a consideration. There is also the possibility of writing off loan interest against tax I’m paying in my off farm income you can only do this for a few years after “starting farming” so my parents can no longer do this and the farm itsef barely breaks even party due to the fact there has been a lot of investment recently in improving infrastructure so there is no real profit to write off against tax there either. This requires further looking into also on the in’s and outs of it though and what the limitations are. I do intent to try Incase income from the farm though and would be buying my own stock etc for putting on the bought land (which as to be done anyway to be considered farming).

I fully understand that the loan would impact on borrowing capacity but I’d be interested to know how exactly they calculate by how much. Is it a simple reduction in income by the amount of the monthly loan repayment for example?

Super critical said:

Definitely not an option using savings, I need most of what is easily accessible for the house and the rest is invested that I don’t want touching. That 50k would take a very very long time to get back from the farm, I wouldn’t consider buying the land a great investment any time soon but in the very long run it will be good to have more land on the farm. It’s also just something we want to do aside from the financials.

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Sounds very much like you just want more land to me based on what you've posted. What's the long term benefit to it? And how long term is long time?

Bronte said:

Sounds very much like you just want more land to me based on what you've posted. What's the long term benefit to it? And how long term is long time?

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Agree with this. I would focus on building my house. The existing tax free thresholds and generous reliefs for farming may not be there in the future.

Super critical said:

In any case we try to avoid if at all possible using off farm income for the farm so the loan would be repaid out of farm income not mine or my parents off farm income or savings (they could also buy it for cash but again don’t want using their off farm savings in this way).

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You seem to be making very artificial silos for your finances.

If your parents have cash, they should use it to buy the land and not take out a loan which would be expensive.

Super critical said:

I need most of what is easily accessible for the house and the rest is invested that I don’t want touching.

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While I can understand why you need to keep money accessible for the house, you should not be borrowing money while you have money invested.

Brendan

I agree with other comments - Savings from either you and/or parents should be used to purchase the land. Borrowing is expensive and will put additional cash flow pressures on your farm - And impact your borrowing requirements for house build.

As many farmers have experienced over the years, buying land with mostly finance is an uphill struggle.

If it’s decided that your parents buy land, then maybe going into an approved department of agriculture parternship, may help you to qualify for young farmer grants etc. or if partnership wouldn’t work, maybe renting the land directly from your father. You probably know better the many different rules there is to qualify for these grants.

This land would then be part of the overall transfer of farm assets from parents to you using the 90% relief. If your parents did buy it, be careful just transfering this land to you. Unlikely would qualify for the 90% relief as you have some non farming investments and your parents are not farming for the required time period (I can’t fully recall the rules)

Firstly thanks for the replies.

Bronte said:

Sounds very much like you just want more land to me based on what you've posted. What's the long term benefit to it? And how long term is long time?

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Admittedly there is an element of this, it’s pretty much the only piece of land bordering our farm that will ever come up for sale so if nothing else we feel it’s better to have it than not have it. There will also be a some small losses in our current land area from my house and potential siblings houses down the line and the farm is already not really big enough to ever be viable as a full time farm however to answer you next question the long term benefit I would see is having a bit more land means as a qualifying young farmer I can apply for for entitlements on it and potentially increase the overall single farm payment on the farm, also more land means more stock can be supported and I’d hope that it would supplement off farm income. The income from it to amount of work required is not great but I enjoy it and very much see running the farm as a sideline as part of my future.

I’d also see it as a potential avenue to retire from off farm work earlier than I ever will if relying on a pension which I really have only a few years paid into in my mid 30’s and have stopped it for the time being also due to my new employer having no pension scheme and needing the money anyway with trying to save and my wife on statutory maternity leave.

Easel said:

Agree with this. I would focus on building my house. The existing tax free thresholds and generous reliefs for farming may not be there in the future.

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The land will be bought either way and I will be inheriting the farm either way so the future tax fee threashold and reliefs aren’t really something that comes into this decision.

Brendan Burgess said:

You seem to be making very artificial silos for your finances.

If your parents have cash, they should use it to buy the land and not take out a loan which would be expensive.

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As I said we have always operated in the principe that the farm has to pay for itself and that won’t be changing. We have borrowed fairly significant for machinery and buildings in the recent past and the farm has covered this (and allowed for significant tax write offs also from interest etc). The aim plan over the last number of years and for the next number if years is to have the farm in a way it can be run quite easily into the future and will provide an additional income, the land is just another step but as I said it must pay for its self. Both my parents have very good off farms jobs with high incomes and they could have easily pumped a lot of capital into the farm for little return but it’s always been something they avoided and it’s a philosophy I very much agree with.

Brendan Burgess said:

While I can understand why you need to keep money accessible for the house, you should not be borrowing money while you have money invested.

Brendan

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Are you referring to the mortgage or the land loan? Either way I’d tend to disagree as the investment is a separate thing from day to day stuff like mortgage or the loan and I’d rather have that gaining value and have a lump sum in future for different things rather than tie it up in land or a mortgage high of which can be paid out of day to day income (a signification chunk of my savings will go into the house though but I plan to leave the investment as is). As for the loan as I said will be paid out of farm income if it’s in my name or my parents name.
Id still like to get a feel for how a bank would treat the loan when applying for the mortgage which was what I was hoping to get an insight into.

Super critical said:

The land will be bought either way and I will be inheriting the farm either way so the future tax fee threashold and reliefs aren’t really something that comes into this decision.

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Then just get your parents to buy the land.

You give the impression in your opening post that the actions taken in relation to the land are heavily influenced by existing reliefs and grants

Easel said:

Then just get your parents to buy the land.

You give the impression in your opening post that the actions taken in relation to the land are heavily influenced by existing reliefs and grants

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Well it is influenced by the fact I don’t want to use up any of my lifetime threashold if they just buy it and put it in name.

There is also advantages of putting it in my name for current grants for improving land (higher grant for young farmer), possibility of getting free entitlements on the land (expensive to buy in comparison to their yearly yield in the single farm payment), potential for tax relief on the loan repayments against my off farm income etc.

The more simple way to do it would be enter a farm partnership as most of the above would apply but it would work out worse overall from a tax bill perspective for us to be sharing the current farm income which would have to happen in a partnership.

As an aside I don’t see any possibility of the tax relief on farm transfers being touched ever maybe as it would simply make transfers unviable plus they are pushing they have basically setup a course purely for people to meet the education requirements of availing of it so if they even hinted at removing it there would be mass protests. Even then if there was a hint of it happening we could bring forward the planned time of farm transfer to get ahead of any changes.

Super critical said:

Admittedly there is an element of this, it’s pretty much the only piece of land bordering our farm that will ever come up for sale so if nothing else we feel it’s better to have it than not have it. .

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So you're listening to your farmer heart instead of your financial brain. You followed that with the most convoluted thinking to justify that decision. And the farm you currently have isn't even a viable business. You've posted us zero figures. Which is very telling. If you come on here, a financial website, we need figures.

Bronte said:

So you're listening to your farmer heart instead of your financial brain. You followed that with the most convoluted thinking to justify that decision. And the farm you currently have isn't even a viable business. You've posted us zero figures. Which is very telling. If you come on here, a financial website, we need figures.

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Ok let’s make it more straight forward forget about the farm, I don’t have figures for it and if I did they really aren’t relevant. It operates around break even which is fine at the moment considering there has been considerable investment in it, it’s also a lot more than just a business it’s something I want to keep going regardless of viability (by that I mean being considerably profitable it needs to pay for itself which is very doable).

Figures let’s say combined income 90k (hopefully more but let’s assume this), one child with a child minder 3/4 days a week and rural so allow around 400 a month, loan repayment around 500 per month (this would be the land loan).

Mortgage required around 300k assuming a cost to build of around 380k so ltv of just under 80%. This would be an estimate on the higher side assuming a contractor price I may go down the direct labor route which should bring down the cost due to lower rates and allowing me to not finish out everything at the start. But for now I’ll go high.

No other debt or major outgoings. Potential for good salary increase is high (a thing I’ve been told by a person who works in bank lending that is considered, I’m not discussing this with him as I would rather keep it private).

So looking at the above will a bank just run away or is there room work with them on the above.

What age are you?

Assuming you will be eligible for a 30 year mortgage you should be fine for getting a mortgage for €300k when your wife is back in permanent employment. You may have to go through a broker.

Yes, the banks offer exemptions to the 3.5 rule for suitable candidates.

I am still unsure as to why you need a €50k loan for the land while you have 100k cash with an additional 25k coming from sale of existing property.

3.5*90k combined earnings= €315k + €75k balance from cash and home equity after land purchase = €390k . You are also saving €900 p/m with parents looking to avail of the €3k p.a small gift allowance

Super critical said:

The more simple way to do it would be enter a farm partnership as most of the above would apply but it would work out worse overall from a tax bill perspective for us to be sharing the current farm income which would have to happen in a partnership.

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Why? You mentioned the farm is breaking even? Seems both you and parents are on the high rate of tax. Any profits less capital allowances from farm would be taxed at the higher rate?

Super critical said:

potential for tax relief on the loan repayments against my off farm income etc.

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What do you mean? Is there a specific relief for this? I am not aware, would like to know if there is.

Easel said:

What age are you?

Assuming you will be eligible for a 30 year mortgage you should be fine for getting a mortgage for €300k when your wife is back in permanent employment. You may have to go through a broker.

Yes, the banks offer exemptions to the 3.5 rule for suitable candidates.

I am still unsure as to why you need a €50k loan for the land while you have 100k cash with an additional 25k coming from sale of existing property.

3.5*90k combined earnings= €315k + €75k balance from cash and home equity after land purchase = €390k . You are also saving €900 p/m with parents looking to avail of the €3k p.a small gift allowance

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Thanks.

I understand we are grand for the mortgage alone but it’s the mortgage with the loan I’d be more concerned about.

As I said land loan will be paid out of the farm either directly if parents borrow or by gifting me the yearly repayments value to cover the loan if I take the loan out. We will not be using savings from off farm income to buy it as I’ve mentioned a number of times.

On top of that approx 30k of my savings are actually locked into an investment that wont be accessible for a number of years. I would be looking at keeping at lest 25k easily accessible for various things that pop up in life and the remaining 70k ish (growing with savings) is earmarked for the house.

Abren03 said:

Why? You mentioned the farm is breaking even? Seems both you and parents are on the high rate of tax. Any profits less capital allowances from farm would be taxed at the higher rate?

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My father is due to retire soon and will drop into the lower rate of tax on his pension. My parents have always been separately assessed therefore once he retires he will have rate band available for the farm. Going into a partnership will impact that.

Abren03 said:

What do you mean? Is there a specific relief for this? I am not aware, would like to know if there is.

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I don’t fully understand the ins and outs but I know that for a few years after officially starting farming you get away to a certain extent in offsetting losses on the farm against tax paid on your off farm income. The idea being to purposely invest in the farm and maximize the tax relief in this period. After a few years revenue start to frown on it so you have to ease off. I can remember my father getting many thousands in tax refunds for a few years after he started out farming in his own name. That the gist if it anyway.

Super critical said:

My father is due to retire soon and will drop into the lower rate of tax on his pension. My parents have always been separately assessed therefore once he retires he will have rate band available for the farm. Going into a partnership will impact that.




I don’t fully understand the ins and outs but I know that for a few years after officially starting farming you get away to a certain extent in offsetting losses on the farm against tax paid on your off farm income. The idea being to purposely invest in the farm and maximize the tax relief in this period. After a few years revenue start to frown on it so you have to ease off. I can remember my father getting many thousands in tax refunds for a few years after he started out farming in his own name. That the gist if it anyway.

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Sorry I get you now, I was confused when you mentioned ‘relief on the loan repayments’. I think you mean offsetting Farm trading losses against other income. Maybe just double check that the farm 3 year loss against non farming income is still in play. I could be wrong, I think it was replaced with other reliefs with different criteria.

Understood about the partnership, however when the farms capital allowances run out, you / father should look into the most efficient structure for the farm, with succession planning in mind. Best to consult with an agri adviser and / or tax consultant.

Anyway, I was going off topic. All the best with house build and land purchase. Hope all works out.