Interest only mortgage to increase return

[frugi]

I am lucky enough to own my flat outright (no mortgage) and it is worth around £120k. I have recently transferred half of this flat into my girlfriend's name. She lives with me and is in full time employment earning roughly £20k net a year.

I would like to borrow £25k with a fixed rate 5 year interest only mortgage against my flat for trading purposes as I am fairly confident of returning more annually than the interest rate charged on the mortgage (c5%). After five years I would pay back the original capital and trouser the difference. Obviously, as I am technically unemployed (one of those much maligned spread bettors I'm afraid), I will have to gently ask my girlfriend to make the application and then pay her monthly to cover her interest payments of approx £100 a month if it is approved. I can afford this out of my usual income if I am careful!

What we are wondering is how to pitch this plan to a lender and stop them trying to fob us off with a secured homeowner loan or similar with a much higher rate (as that would render the exercise pointless)? I was hoping someone has done something similar as the cost of capital is so cheap at the moment, perhaps by way of a remortage. I have a nasty feeling if she says that the money is for investment purposes we will be knocked back immediately. Do we have any chance at all of doing this? From a lender's point of view it should be a dead cert because even if I manage to lose the lot we would still own the property and be able to sell it in an emergency, but I doubt they'll see it that way. A friend suggested we say it is for home improvements as mortgage companies love the added value, but I do not want to blatantly lie to them.

Any ideas folks? Thanks very much.

 

[eminem]

With the amount you are looking to borrow versus market value of property it should be a piece of p***. Due to the low loan to value ratio there should be a lender out there who will do it non-status i.e no questions asked. You will not need to prove income, you may even not need to divulge use of proceeds (but if you have to home improvements might be a good idea ). When I bought my last property I used interest only, non-status. The only questions asked were name, address, date of birth. That was it, nothing more.

Just need to search around for the right lender. PM me if you need any more info.

M&M

PS there isn't usually any interest rate penalty either, normally normal market rates or there abouts.

 

[Skimbleshanks]

I was just going to say tell them 'home improvements', and then got to the last line to see that the suggestion had already been made to you.

Home improvements always seems to work - and perhaps you wouldn't be lying, technically. You see, by trading and making money, you will naturally want to splash some of your winnings on the house (your girlfriend will anyway), and what with a lick of paint here and a new cushion or two there, you are actually improving your home.

My friend used to go to her bank manager, mention home improvements and get a loan - buy a property in Spain, rent it out, a year later pay back half the loan, then she'd go back for another loan, etc. Built up quite a nice little empire on that basis.

 

[ChartMan]

Your problem is this. You may find the lender will insist on a joint mortgage. If you have no "track record" you may have a problem. Getting 25K against 120K is no problem. As a last resort, a bank will lend you this as a "business loan" at 2 or 3 over base, variable. Try Virgin One. They made me an offer after due consideration of my complex finances. They don't do fixed rate ( I don't think)- it's a "flexible mortgage" linked to the daily base rate.One advantage is, that they don't seem to care if you reduce your capital or not. I'm not sure how they would view no payments at all. I don't think you're going to find too many , if any , offers of a 5 year period. That may be YOUR plan, but a B/Society will have 20 years in mind. A repayment mortgage of 25K over 20 years is gonna take £120 pm or so PLUS life policy
You of course know that everyone will tell you" never borrow to trade"....

Edited by ChartMan for a gross over sight.

 

[Trader333]

A pm would have been better, Paul, but advice taken. Really sorry about that.
ChartMan.

Point Taken I have removed my original comments from this post.


Paul

 

[options]

Yeah. Mmm. Can anyone tell me how to hotwire the new Porsche?

Seriously. Agree with T3. Not on a public board please. Open to trouble. Least you could do is to pm the guy. Needs to be pulled, or at least spoken of in a hypothetical manner.

Now, about this friend of mine that wants to know how to hot wire a Porsche. He wants to know if it is still the pos and neg ignition wires?...

 

[frugi]

Thanks folks. Astute, encouraging and helpful as ever.

Fraud though Paul? Surely not? I have no intention of ripping anyone off. The trouble with mortgage lenders and the regulations that they are supposed to follow is that they are apt to pigeon hole people to a ludicrous degree which means those in situations like mine can be rudely excluded from the borrowing process by petty bureaucracy.

Although I would pose a considerably smaller risk to a lender than, say, the typical highly leveraged buy-to-let empire builder (who will of course have profligate lenders queueing up to throw money at them) the regulations say "No, where's your P60 and employment history?", fail to take into account my solvency and ability to repay (even if I mess up horrifically) yet favour the aforementioned taking far larger risks in a faltering property market. I do not understand why the lender cares how the money is used as long as they can be sure of repayment, which, in my case at least, is easily demonstrable. I know I'm in a lucky position, but I can't be the only one.

So, I do not see a bit of creative adjustment to my reasons for requiring the loan as fraud at all, merely a method of extracting the money in a way that sits best with the blinkered regulations the lenders have to follow (though often don't as proved by the recent secret filming shown on the news and subsequent sackings of certrain mortgage advisors).

I had only managed to read half of CM's post before he changed it so forgive me if he was suggesting something more sinister, but I imagine he wasn't.

 

[oatman]

http://www.charcolonline.co.uk/

 

[Trader333]

frugi,

So, I do not see a bit of creative adjustment to my reasons for requiring the loan as fraud at all, merely a method of extracting the money in a way that sits best with the blinkered regulations the lenders have to follow

It doesnt matter how you see it or the reasons for doing it, in law it is fraud if you obtain money or goods by deception. The fact that this doesnt sit comfortably with your reasoning is not relevent. I agree that red tape and bureaucracy make it very likely that many people will obtain loans in the way described. Unfortunately it does not alter the facts as have been given.

I am not making out I am some how holier than thou as I am sure we all break the law by, for example, speeding when driving etc



Paul

 

[frugi]

Thanks oatman I'll have a gander tomorrow.


A market never collapses until your short has been stopped out by 2 ticks

 

[ChartMan]

Feeling the need to tell a fib shouldn't come into it. He's looking to be a "first time buyer" and obtain a mortgage , isn't he? .The fact that he actually owns the property is largely irellevant, I would have thought. Maybe I'm wrong.
I guess the way to find out is to go and talk to an estate agent... Charcole & co will get you anything mortgage wise, at a price. Beware, there are plenty that will lock you in at day one with a "finders fee" that you will HAVE to pay IF you don't take their mortgage offer......£400 ish.

 

[frugi]

No worries Paul I take your point and agree that a private conversation is one thing, a public board quite another. I certainly do not aim to obtain money by deception and will research the matter further with a few of the former! If anyone wishes to lock this thread I entirely understand.

Now then, will she prefer frilled or a more conventional cushion I wonder?

 

[eminem]

I think there are quite a few "white lies" told day-in day-out to get mortgage applications through and I speak from experience here as I have been involved in this market. There are a number of stories that I can't re-tell here but would make you cringe on hearing them, some bordering on the outright criminal, but that was the market at the time. It was widespread, everone knew about it but nothing was done coz the most important thing was meeting lending and life insurance targets.

On my own application I was told to NOT complete the income details page and if I were to put in any figures I could jeopardise the application - it wasn't a dodgey broker that told me this it was the lender!

IRO your own situation Frugi, if you have never had a mortgage on the property that may cause more issues than anything else, just something to be aware of.

PS. Does anyone remember a guy off the TV, Jonathan Maitland, does a bit of investigative journalism?? At the time of the dot com boom he re-mortgaged his house to borrow £50K to put into stocks and shares and spreadbetting as the market was only going one way. He wrote a book about his experinces using online trading and the ups and downs of his portfolio, the point is I think he told his lender what he money was for and they still lent it to him. Just goes to show.

 

[darrenf]

I remember Jonathan maitland. He was on "tonight... with Trevor Mcdonald" and I think he was also the guy that had a weekly column in the sunday times.

I remember he kept on buying BT and the like when the market, particularly anything tech/ telecom related was plummeting. Very amusing.... sorry I mean interesting!

Anway, back to the point about mortgages.

Have a close look at current account mortgages. They are basically a mortgage facility coupled with a current account as one (hence the "virgin one account" which has already been mentioned- there are other similar facilities about).

Basically, you set an upper limit which you can draw on the equity in your property, say 25k. Once the limit is set, you can write out cheques for any purpose. I know a number of people who have used these facilities to go off and buy investment properties abroad. Once the initial limit is agreed, you can use the cash for whatever you want as I understand it. It's a bit like having a large overdraft facility which is secured on your property.

If you wanted to pay the money back after 1 or 2 years in part or full, you just pay it back into your account and reduce the overdraft and interest payable.

 

[RogerM]

think there are quite a few "white lies" told day-in day-out to get mortgage applications through and I speak from experience here as I have been involved in this market. There are a number of stories that I can't re-tell here but would make you cringe on hearing them, some bordering on the outright criminal, but that was the market at the time. It was widespread, everone knew about it but nothing was done coz the most important thing was meeting lending and life insurance targets.

Well said eminem - that says it all. It's always the saleperson that gets the blame, never the employer which sets aggressive targets with the threat of job loss if they are not achieved.

There was an interesting program on mortgage fraud on BBC2 earlier this week. 9/10 mortgage brokers in Ealing advised a mystery shopper applicant on £30K p.a. to self declare an income of £50-£56K p.a. in order to get the property she wanted, which cost £225,000. This raised the income multiple from the normal 3.25 - 3.5x to nearly 6x.

The advisers in question have already been suspended and in some cases the lenders have withdrawn the self-certification product. At the same time the view is that interest rates will rise by 1.5% by this time next year, which will increase mortgage payments by about 35%. Many buy-to-let homeowners are finding that tenants are difficult to come by, and those already renting are negotiating reductions in rent if they are to stay. A rise in interest rates at a time of falling rents will create a number of distressed sales by owners who have no need to buy. Add that to massive mortgage fraud which has left many borrowers catastrophically over extended plus rising rates make the medium term outlook bleak imho.

 

[frugi]

Thanks darrenf and others,

I've just applied for a Virgin One account and will hear back within 24 hours. It is almost exactly what I was looking for, and cheap, although the rate is variable which concerns me a little. However should rates rise above my comfort level I could transfer some of the loan from my dealing a/c into One to reduce the monthly payment (and eventual return, of course). If they reject my application my girlfriend will have a go with her superior employment credentials. I'll let you know what they say as it might be useful.

Cman, I know borrowing to trade can be unwise as the pressure to perform is increased, especially with interest payments to cover. But the figures are alluring. To break even on a 4.75% fixed rate loan of 25k over 5 years only requires a 4.354% return compounded. To come out £10k ahead requires 10.37%. Somewhere between the two is easily achievable with minimal risk IMHO.

(Both calculations assume a fixed rate of interest, paying the interest out of other income and then paying myself back with a lump sum at the end of the term.)