Reply to: Higher rent with cashback to tenants, to boost mortgage lend amount?

[eek]

I think the whole thing is going to rely on trust to a certain extent but I take your point.

Trust has a habit of disappearing if a fast buck (or free house rental) is possible.

[d000hg]

I would suggest that "custom and practice" might be an issue for you if the tenant decides to reduce any payment to £0 and you decide to pursue them through the courts.

I think that you should seek professional advice on this scheme of yours.

I think the whole thing is going to rely on trust to a certain extent but I take your point.

[wattaj]

...The idea to simply sign a higher rental and let the tenants underpay without kicking up a fuss is kind of interesting at face level.

I would suggest that "custom and practice" might be an issue for you if the tenant decides to reduce any payment to £0 and you decide to pursue them through the courts.

I think that you should seek professional advice on this scheme of yours.

[d000hg]

Sign a new lease at £350 / month for twelve months. If your renters can't afford that, tell them you'll subsidise it and personally hand them £100 / month cash for twelve months. Take out your mortgage. When the lease expires, agree on a new one with your renters at mutually agreeable terms. Perhaps it will be £250 / month.

Don't agree the future now, though, that could be considered obtaining the mortgage fraudulently. If you reduce the rent later and then default, the mortgage company will allege fraud. You might consider it better to pay down the mortgage some before reducing the rent.

I don't know if cashback vouchers to a supermarket could be treated as an expense for tax purposes or not. I imagine cashback incentives are, especially if they are contractual. But if they are contractual, the mortgage company should be told about them and then it accomplishes nothing.

Personally, if I were running a charity rental (that's what this is, even if not in the legal form of a charity), I'd want to keep the debt on it below 50%. I'm quite happy to be generous but not to create significant financial risk doing so. But you've not told us why you want the cash, and the amount and reasons are your own business.

When you say the rent will cover the interest on the loan, you are remembering that the rent is taxable and the interest is not deductible, right? So for the rent to cover the interest, you have to be thinking about the rent after tax has been deducted. If you are going to be operating inside IR35 post-April, that means higher rate band tax, presumably.

Thanks that all makes sense. I don't know what proofs the lender might ask for - presumably they are entitled to demand a copy of a tenancy agreement? Or can they only stipulate that we have one in place?
If they were able to demand to see historical records then changing things now mightn't help. Which sounds draconian but in modern Britain financial institutions seem to have near-unfettered access under laundering/fraud/responsible lending rules.

The idea to simply sign a higher rental and let the tenants underpay without kicking up a fuss is kind of interesting at face level.

[WordIsBond]

Sign a new lease at £350 / month for twelve months. If your renters can't afford that, tell them you'll subsidise it and personally hand them £100 / month cash for twelve months. Take out your mortgage. When the lease expires, agree on a new one with your renters at mutually agreeable terms. Perhaps it will be £250 / month.

Don't agree the future now, though, that could be considered obtaining the mortgage fraudulently. If you reduce the rent later and then default, the mortgage company will allege fraud. You might consider it better to pay down the mortgage some before reducing the rent.

I don't know if cashback vouchers to a supermarket could be treated as an expense for tax purposes or not. I imagine cashback incentives are, especially if they are contractual. But if they are contractual, the mortgage company should be told about them and then it accomplishes nothing.

Personally, if I were running a charity rental (that's what this is, even if not in the legal form of a charity), I'd want to keep the debt on it below 50%. I'm quite happy to be generous but not to create significant financial risk doing so. But you've not told us why you want the cash, and the amount and reasons are your own business.

When you say the rent will cover the interest on the loan, you are remembering that the rent is taxable and the interest is not deductible, right? So for the rent to cover the interest, you have to be thinking about the rent after tax has been deducted. If you are going to be operating inside IR35 post-April, that means higher rate band tax, presumably.

[d000hg]

I just don't see why you need to mess about if the rent you're charging is sufficient to cover the loan.

The rent covers the loan but lenders won't offer the loan because they lend based not only on LTV but on rental yield.

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[rootsnall]

I just don't see why you need to mess about if the rent you're charging is sufficient to cover the loan.

They haven't got the loan yet, they want to raise the rent figure to give to the lender when applying for the loan.

Can you not just put up the rent temporarily to secure the loan ? They can under pay you and run up arrears which you just waive when you revert to a lower rent.

[ladymuck]

I just don't see why you need to mess about if the rent you're charging is sufficient to cover the loan.

[eek]

You are aware that the interest will not be tax deductible so you will need to pay tax the increased rent.

[d000hg]

Surely the BTL mortgage company would look at the market rate for the rent when determining whether the loan amount would be covered by expected rent, and not accept some arbitrary dreamer rent achievable put forward by the loan applicant.

Loan applicant: "Oh we know the market rate for rent for this type of property in this area is only £500/month but we intend giving the house a fancy posh name so we can charge £700/month."

BTL mortgage provider: "Oh in that case no worries, your loan is approved."

Sound likely?

On the other hand some lenders want to see that the loan is covered by more than the rent for affordability during voids in the rent when the property is empty, so if you can show you can cover say 150% of likely rent through actual rent plus supplemental means (income or savings) then a higher LTV may be achievable without having to mess about with dodgy schemes to get an artificially high rent.

I think you may have misunderstood... Or I have misunderstood you.

They would look at the market rent by default but because we have a tenant in place, they will look at the rent we receive; they probably take the lower if the two if we're being technical?

I am not suggesting we try to get the rent on the tenancy agreement higher than market rate, but discussing reducing the discount. Right now we charge about 50% market rate, if it was even 75% market rate the yield calculations would allow a 60-75% LTV.

E.g market rate is £500, we increase rent from 250pcm to 375pcm to placate the lender.

Sorry if I'm not being clear?

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[d000hg]

I meant the rent you actually charge, not the market value.

so did I. Even the discounted rent we currently charge is enough to service a 75% mortgage interest only.



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[ladymuck]

If I took a 75% mortgage, the rent would cover the interest and my costs. Mortgages are disgustingly cheap and houses are very inexpensive up here (5 figures)

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I meant the rent you actually charge, not the market value.

If what you charge covers the costs with extra wiggle room (150% as mentioned above) then there's no need to enter some scheme to fudge the figures.

[ChimpMaster]

You'll be paying a lot more tax due to the rent increase. I doubt the 'cashback' is an allowable expense.

[Hobosapien]

Surely the BTL mortgage company would look at the market rate for the rent when determining whether the loan amount would be covered by expected rent, and not accept some arbitrary dreamer rent achievable put forward by the loan applicant.

Loan applicant: "Oh we know the market rate for rent for this type of property in this area is only £500/month but we intend giving the house a fancy posh name so we can charge £700/month."

BTL mortgage provider: "Oh in that case no worries, your loan is approved."

Sound likely?

On the other hand some lenders want to see that the loan is covered by more than the rent for affordability during voids in the rent when the property is empty, so if you can show you can cover say 150% of likely rent through actual rent plus supplemental means (income or savings) then a higher LTV may be achievable without having to mess about with dodgy schemes to get an artificially high rent.

[d000hg]

If you took a 45% LTV mortgage, would the rent you charge cover the payments?

If I took a 75% mortgage, the rent would cover the interest and my costs. Mortgages are disgustingly cheap and houses are very inexpensive up here (5 figures)

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