6 – INCREASING YOUR BUYING POWER WITHOUT INCREASING YOUR STATUS RANKING

Buying Power

Let me remind you of what buying power is:

BUYING POWER = (deposit you actually have) + (mortgage you’re able to get)

I showed you how to increase buying power by increasing your status ranking in chapter 5.  This involved, amongst others, increasing your deposit by saving, increasing your salary by working harder and increasing your credit worthiness by redeeming credit card debt.  This all seems like too much effort!  There are easier ways to increase your buying power.

I have identified the following ways to increase your buying power without having to increase your status ranking:

1. Vendor Incentives – Vendor Gift or Cashback
2. Get a Guarantor

• 100+% Loan To Value Mortgages

1. Unsecured loans
2. Get a Partner
3. Self Certification Mortgages – No Proof Of Income

• High Income Multiple Mortgages
• Shared Ownership Schemes

I           Vendor Incentives – Vendor Gift or Cashback

This is where you basically get the mortgage lender to pay most of your deposit!  This is best explained by the following example of Vendor Gift below:

Gavin wishes to buy his first property for £54,000 but he has no money for a deposit.

Without Vendor Gift Gavin has a shortfall of £5,400 so he cannot buy the property.

With Vendor Gift Gavin has no shortfall.  The vendor gets:

£60,000 - £6,000 = £54,000

The inflated purchase price - vendor contribution = original asking price.

Gavin gets:

His first property costing £54,000 for no money down.  His borrowings are however greater than 90% loan to value.  His borrowings are 90% of £60,000 = £54,000.  This equates to 100% loan to value.  In effect Gavin is borrowing all of his deposit from the mortgage lender.  Note he is not borrowing any of the deposit from the vendor as the vendor has got his full asking price of £54,000.  The vendor deposit figure is purely a notional figure.  So Gavin’s buying power has risen from nil to £54,000 without changing any level of his deposit, income or creditworthiness.

This trick is completely legal but relies on the property being valued up to £60,000.  This is likely because of three reasons:

• Valuers do not like to down-value a property - unless there is something wrong with it!  If they think the purchase price is only slightly higher than what it is worth they will always value it at the purchase price.  This is because the valuer knows that valuations are not an exact science.  Valuations are based on what people will pay for a property and he will assume that if you are willing to pay £60,000 then the property is probably worth £60,000.  A 10% gross inflation of the purchase price is not a lot considering you are only talking about an inflation of £6,000. For higher value properties (greater than £200,000) I would suggest a 5% vendor deposit contribution as £10,000 purchase price inflation could be contested.
• You may be getting a bargain property -  i.e. the property is worth £60,000 but you are actually getting it for £54,000,  hence it values up to £60,000.
• Valuers are under pressure to value properties at the purchase price -   Lenders make money by lending money.  If they instruct  a firm of valuers that keep on down-valuing properties then it becomes difficult for the lender to lend and hence make money.  The more the valuer values property at the purchase price the more money the lender makes.  Especially in the current rising property price conditions, even if the valuer thinks that the purchase price is 1% or 2% inflated he will assume that it will reach the valuation in a few months anyway.

Cashback works in the same way.  In the above example the deal would be structured as:

£60,000 purchase price + £6,000 cashback.

So when you buy the property you put down £6,000 as your deposit, which you may have borrowed on your credit card, and get £6,000 back when you complete the purchase enabling you to pay back your credit card company.

There are tax issues.  The vendor has to declare the inflated sales price to the Inland Revenue and thus will have to pay more capital gains tax as his gain is deemed to be higher.  For the vendor this may not be a problem as the Inland Revenue gives you an allowance in excess of £7,000 for a capital gain.  If this inflated price does not take the gain above this allowance then there is no increased capital gains tax to pay.

II          Get a Guarantor

You can get a mortgage beyond your affordability limits by getting a guarantor.  A guarantor is liable for the mortgage payments and whole balance in the event of your default.  A guarantor guarantees that you are a good bet.  There are mortgage companies that will grant you a mortgage if you have a guarantor that has good credit.  They simply credit check the guarantor as well as you and consider whether your guarantor could pay the mortgage in the event of your default.

The key points are that:

• The maximum mortgage available is calculated on the guarantor's income less existing commitments.
• The guarantor must have good family ties with the applicant and be able to demonstrate the ability to cover their own financial commitments together with the applicant’s total mortgage commitment.
• The Lender’s normal income criteria is applied to assess the mortgage, but by using the guarantor’s income as a basis for the maximum loan.
• The Lender will make an assessment of the main applicant's future earnings potential, to ensure that they the loan applied for can be covered without the guarantor's support later in their career.
• The guarantor can be released at any time providing the borrowers income covers the outstanding mortgage.

So, for example, Richard who earns £15,000 pa, a young graduate, could get a mortgage of £100,000 if his parents acted as guarantors and if Richard’s income was set to rise to £25,000 within 5 years.  This could be likely if he was a graduate trainee and qualifying in 3 years after all his professional exams i.e. like an accountant or solicitor.  So richard’s buying power has increased from £60,000 (being 4 x £15,000) to £100,000 (£25,000 x 4, assuming he will be earning £25,000 within 5 years).

A list of guarantor mortgages can be found in the reference chapter.  You can also ask any lender if they would consider taking on a guarantor as this part of the market is relatively new.  There will be more introductions of these types of mortgages in the future.

III         100%+ Mortgages

Having a deposit is advisable as there are more products available to you.  If you find saving too painful then there are mortgage companies that will lend you the whole amount.  There are even lenders out there that will loan more than the value of the purchase price.  The excess amount over the purchase price can be used to improve the property thus pushing up the value of the house.   So your buying power can go from £nil, due to the fact that you think no one will lend to you, to £250,000, the maximum 100%+ loan to value mortgage you can get.  This is best explained with an example.

Joanne, who has no deposit, decides to buy a property for £100,000 but the kitchen and bathroom is in poor repair.  She gets an estimate for the work and she finds a builder that will do the complete job for £5,000.  Joanne decides to go for the property and apply for a 105% Mortgage.  This will mean that she will get:

£100,000 to purchase the property

£5,000 to repair the property

After the repair the property will be worth £110,000 as the property is more saleable now as the property is more presentable to the market.  Thus her buying power has increased from £nil to £110,000 due to the fact that Joanne took on a mortgage that was greater than 100% loan to value.

A list of all the 100%+ Mortgage Providers can be found in the Reference Chapter.

IV        Unsecured Loans

As I have said earlier having a deposit is advisable.  Well you can get one instantly by simply borrowing it!  I would suggest that you only take on this credit (if you are borrowing from a credit card or bank) after your mortgage application has been submitted and you have been credit checked otherwise this borrowing will show up

You can get the deposit from the following sources:

Buying power is increased due to deposit levels being increased.  The size of the buying power increase can be many hundreds of thousands of pounds especially if you could not buy unless you had a deposit.

V         Get A Partner

 Now I’m not saying go out and get married to the next girl or boy you see or move in with your partner who you are quite frankly unsure about.  I just want to show you how a partner, be it a romantic interest or simply a friend or family member, can increase your buying power.

Taking on a partner can have the following effects depending on the status of the partner and has the following drawbacks:

I am involved in a TV programme which will exactly about this concept.  It will be following first-time buyers put together so that they can purchase their first home together and sell within 2 years, make a gain, split the gain and then use this gain to buy their own property individually.  You could use a partner in this way where you both mutually benefit.  It is worth planning the exit route and only enter in to this type of agreement with people you trust.

VI  Self Certification Mortgages – No Proof Of Income

Lenders can be awkward when it comes to proving your income.  If you are self employed and get paid in cash it can be sometimes difficult to prove your income.  If your accountant is not chartered or certified or you have prepared the accounts yourself then the lender point blank refuses that you have earned that income.

With self-certified mortgages the lender does not require proof.  You simply self certify your income.  Now this does not mean you lie!  It means that they will rely on what you say you earn to lend to you.  There is no point in getting a mortgage that you cannot afford!

Self-certified mortgages require a minimum deposit level of 10% so it is key to raise a deposit by either saving or the ways listed above.  Buying power is increased from nil to something even though you cannot prove your income!

If you do require your accounts to be certified by a qualified accountant then contact Accountants Direct on (01279) 833 833.  They will be happy to do this with limited supporting documentation.

The best self-certified lenders can be found in the reference chapter.

VII       High Income Multiple Mortgages

Instead of going for the standard 3.5 times single income or 2.75 times joint you can go to the more flexible lenders that offer up to 5 times single salary + second income.  In the reference chapter there is a list of lenders who offer greater than 4 times salary.

This increases your buying power due to the lender offering to lend more than the normal income multiple.

VIII      Shared Ownership Schemes

There are many housing organisations that offer you a part buy of their homes.  So you can buy, say 50% of the home, and pay a subsidised rent on the other 50%.  You then simply only need to get a mortgage for 50% of the value of the house.  So for a house worth £200,000 and you wanted to buy 50% of this then you would only need a mortgage for £100,000.

This way you get to live in a £200,000 house with only a £100,000 mortgage.

Combining A Number Of These Tricks To Quadruple Buying Power

So, for example, if you earn £20,000 and have a deposit of £5,000 then under standard terms you could buy a property for:

£5,000 + (3.5 x £20,000) = £75,000

If you took on a bit of advice from above you could:

• 1. take on a partner earning £25,000
  2. use £10,000 from a credit card
  3. go for a high income multiple mortgage
  4. Go for a 50% shared ownership house

Then you can borrow:

£5,000 + £10,000 + (5 x £25,000) + £20,000 = £160,000

Original Deposit + Credit Card Loan + (5 x 1st Applicant’s Salary) + 2^nd Applicants Salary = Buying Power

You could then buy a house worth £320,000 on a 50% shared ownership.

So you can see that buying power has increased from £75,000 to £320,000 without increasing your status ranking!

If you decided not to go for the shared ownership scheme you could still raise your buying power from £75,000 to £160,000 which is still more than double.

And if you decided not to take on a partner your buying power still rises from £75,000 to £230,000.

Click here to download the complete book as PDF

CLICK FOR NEXT CHAPTER

The Ajay Ahuja Website - full of free advice, property tips and more...