One of the things I find hard to get my head around is all the different mortgages out there. To make it even more complicated, mortgage lenders seem to change their rates and products all the time, so I got a mortgage in principle on one product but will probably have to get a different mortgage. www.moneymadeclear.fsa.gov.uk is a website run by the Financial Services Authority which has a lot of helpful information.
Stewart is temping at the moment and doesn’t have a fixed income but if we applied for a mortgage jointly, his student loan and any other loans would be deducted from the amount we could borrow. He could self-certify the amount he earns, but it complicates matters. Therefore, we opted to get a mortgage just on my salary. This may well work in our favour in the future as we’re both first time buyers. If Stewart gets a steady job for the next property we could apply jointly but with him as the first applicant and me as the second. That way we’d still be able to get the first time buyer mortgage on a second property.
When we looked at the various mortgages we could get, we initially decided to go for 100%. There is actually a product to get 120% - part of which is the secure mortgage and another part is an ‘unsecured loan’. The mortgage I’m looking to get also has a borrow-back facility. I can actually get 120% on the maximum amount based on my salary and immediately pay back the extra amount on the mortgage. This seems a little pointless. However, the borrow back facility means that I can draw down money from the mortgage which means that should we run out of money for the development costs we can get some extra cash through the mortgage. We would have to draw down a minimum amount (£700 on the product we were looking at) and obviously the monthly mortgage repayments would go up, but it’s there if we ever need it.
One of the things I’ve looked into is capital gains tax. As long as the property is your main or only residence you won’t incur capital gains tax. However, you have to tread carefully as if you’re self-employed as a tradesperson of some sort – plumber, builder or whatever – it might be seen as trading and then you’ll have to pay income tax. If you do more than one property development and start to do a couple or more a year, they’ll also see it as trading whether it’s your main occupation or not and you’ll get taxed accordingly depending on your overall income with the profit included.
If the property is your second property and you’re liable for capital gains tax, there are a few things to consider. You have a capital gains allowance for the tax year – in 2006/07 it is £8800. This is per person so if you’re buying with a partner it will be £17600. Also, and money you put into the property for development can be off-set against your profit (this doesn’t include costs of buying and selling), so you need to keep all your receipts and paperwork for everything so you can prove your actual net profit. Therefore, if two of you buy a house for £125,000, spend £12,000 on renovating, and sell it for £155,000, the taxman will see that your profit is £30,000. If you can prove that you spent £12,000 on the development, this will be deducted, leaving you with £18,000. Together you have an allowance of £17,600 so you’ll only get taxed on £400 or £200 each.
For Stewart and me, we’ll have to prove it’s our main residence (through bills, postal address, council tax etc) and capital gains tax then won’t apply. However, if it was our second residence and capital gains tax did apply, then we would consider having a joint application for the mortgage in order to get the joint capital gains allowance when we’d sold.
Lots to think about – for tax issues, if you’re not sure where you stand, speak to an accountant. I rang up my father’s accountant and asked him where we stood and he basically confirmed the above.
Em
