Loan to Value query

smndly

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We're getting a mortgage from UB to buy my partner's mother's rental property. The house is worth 400k but my mother in law will sell it to us for 300k (she is aware of CGT implications for herself and that they will be on the 400k value). We are looking at getting a mortgage of 265k and our savings will make up the difference of 35k. We advised UB of the gift of 100k.

Initially we were being quoted a 2 yr fixed rate of 2.25%. as the LTV was in the 60-80%bracket. However, we clarified with UB that the gift will be in the form of selling the house below market value rather than cash. This has led UB to say that the value for the LTV is the 300k figure rather than the 400k thus increasing our rate to 2.4% as our LTV would now be >80%.

I was surprised at this, especially seeing as UB will be sending out a valuer who will value the house at around 400k. Is this common practice or should I pursue this further?
 
she is aware of CGT implications for herself and that they will be on the 400k value
Are you aware of the gift tax element? Your partners mother is a 'stranger' to you in the eyes of Revenue, so you'll be subject to gift tax (there is potential to get a credit for the CGT paid against the CAT element).
You also pay stamp duty on the full market value.

I'm not sure what UB's policy is on this, but some banks don't really like purchases below market value, especially if it's not a house that there is an easily supported valuation for. They've all been caught out in the past particularly with 'one-off' houses which really weren't worth what the valuer said it was.

It might be 'cleaner' all around if you could buy the house at full market value, and then your partners mother gives them alone a gift of 100k. No tax implications for you.

Out of interest, why are you going for the 2 year rate rather than the 5 year high value at 2.2% (LTV doesn't matter)?
 
Thanks for the reply RedOnion,

Are you aware of the gift tax element? Your partners mother is a 'stranger' to you in the eyes of Revenue, so you'll be subject to gift tax (there is potential to get a credit for the CGT paid against the CAT element).
Yes I am aware of this and will likely chat to an accountant about it soon. We are getting married this year but my understanding is this will make no difference to the CAT element if the house is sold to us pre or post marriage as the gift will be deemed from MIL to me rather than Wife to me and so will be category C regardless.

I was unaware of the CGT credit though which could soften the blow. How would this be calculated?


It might be 'cleaner' all around if you could buy the house at full market value, and then your partners mother gives them alone a gift of 100k. No tax implications for you.
Unfortunately, we can't get much more of a mortgage than 265k at present so this is out of reach for us (currently a single income household).

Realistically, I can't see any option to reduce the CAT I would have to pay given the circumstances. My partner's mother doesn't have 100k cash to gift her now directly which would have been cleaner.

I'm not sure what UB's policy is on this, but some banks don't really like purchases below market value, especially if it's not a house that there is an easily supported valuation for. They've all been caught out in the past particularly with 'one-off' houses which really weren't worth what the valuer said it was.
I just don't understand how UB can say the value of the property is 300k for LTV but their valuer will say its 400k. The house next door was sold 2-3 years ago in the same condition so it should be a reasonably accurate valuation.

What I was also considering is getting a variable mortgage and then immediately after that is sorted, get the house revalued and then get a 2 year fixed rate at 2.25%. I'm not sure how difficult this would be and if UB would be happy that this satisfies their LTV rules.

Out of interest, why are you going for the 2 year rate rather than the 5 year high value at 2.2% (LTV doesn't matter)?
The plan is to fix for two years then do a few cashback switches and ultimately end up with avant. In addition, I could see us moving to a larger home in 3-4 years when we will likely be a dual income rather than single income couple and would like to avoid fixed mortgage break fees at this time.

However, I am open to the idea of the 5 year fixed rate in case we do get a period of inflation which could result in ECB increasing interest rates and it looks more enticing now that we're being moved up to the >80% LTV 2 year bracket.
 
That’s nonsense.

The value for LTV purposes is €400k, not €300k.

€400k is the value for CGT purposes, stamp duty purposes, and CAT purposes.

But do it a different way; transact at €400k with the consideration being €300k plus a €100k promissory note. Then your mother-in-law can write-off €6k a year of the balance on the loan note, thus potentially preserving everyone’s CAT thresholds.
 
But do it a different way; transact at €400k with the consideration being €300k plus a €100k promissory note.
Yes, the 100k doesn't have to be a cash gift, and yours is a neat solution to the CAT.

The plan is to fix for two years then do a few cashback switches and ultimately end up with avant.
Just note, you're assuming here that cashback will still exist in 2 years.
It might, but a lot of things could change in that timeframe.
 
That’s nonsense.

The value for LTV purposes is €400k, not €300k.

€400k is the value for CGT purposes, stamp duty purposes, and CAT purposes.

But do it a different way; transact at €400k with the consideration being €300k plus a €100k promissory note. Then your mother-in-law can write-off €6k a year of the balance on the loan note, thus potentially preserving everyone’s CAT thresholds.
That's an excellent suggestion thanks Gekko. Would I approach an accountant about getting that set up appropriately?

Only concern is would the bank pull back from the loan offer as there would be a debt/promissory note owed to a third party (mother in law) involved I wonder?
 
I just don't understand how UB can say the value of the property is 300k for LTV but their valuer will say its 400k. The house next door was sold 2-3 years ago in the same condition so it should be a reasonably accurate valuation.
In that case, there really shouldn't be an issue.

I've seen a case previously where the person buying house had no deposit at all, and there weren't any issues with the parent 'gifting' them their deposit by way of sale under market value. The only thing I remember in that case was the bank insisting on a specific independent valuer rather than the borrower choosing from a panel.

Are you dealing with a broker, or directly with a mortgage advisor? Sounds like you need to talk to someone with common sense.
 
Are you dealing with a broker, or directly with a mortgage advisor? Sounds like you need to talk to someone with common sense.
We're dealing directly with UB manager.

I've had a good think about this all now and feel i've come up with another solution which may work. We have 105k in savings but we were only going to use 35k for the house purchase with a view to doing some renovations and having a rainy day fund. However, if we use most of our savings for the house purchase and then my partner gets a cash gift from her mother directly into her account this will hopefully avoid any CAT issues.

Original plan:
House Price 400k
Mortgage (265k)
Gift (100k)
Savings (35k)
I would be deemed in receipt of 50k gift. CAT category C. Tax payable 50-16.25*.33= 11k

Revised plan:
House price 400k
Mortgage (265k)
Savings (103k)
Gift (32k)
I would be in receipt of 16k gift which is below the exemption level for Cat C CAT therefore Tax payable = 0
Then MIL would gift my partner 68k into her own bank account leaving us with the same outcome.

If Ulster Bank dont back down on their LTV calculation, this would still bring us into the 60-80% category so a 2.25% rate rather than 2.4%

I will look into the promissory note/loan too as an alternative but I feel the bank may not be too keen with this as we would then be in debt to the tune of 100k. Would I need a solicitor or accountant to set this up or could we just draw up an agreement ourselves?
 
However, if we use most of our savings for the house purchase and then my partner gets a cash gift from her mother directly into her account this will hopefully avoid any CAT issues.
If you have the cash, this makes perfect sense.
To avoid any CAT issues at all, as you're not married, my understanding is that you don't have to own the house on a 50/50 basis. Your partner could own a bigger portion to reflect the additional 100k they put in.
Someone with better knowledge might confirm (or correct me!).
 
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