Providing a private mortgage for our son

[halobap]

Not sure if this the best board for my question.

We, married couple mid 60's,are considering providing our 36 year old son with a mortgage ourselves, a private mortgage.

We are interested in the pros & cons if we decide to go down this path. We are financially stable, can free up the cash without affecting our lifestyle, we would still have substantial reserves.

Some advice on how to go about things if we go this way would be really appreciated.

TIA halobap

[supremetwo]

Not sure if this the best board for my question.

We, married couple mid 60's,are considering providing our 36 year old son with a mortgage ourselves, a private mortgage.

We are interested in the pros & cons if we decide to go down this path. We are financially stable, can free up the cash without affecting our lifestyle, we would still have substantial reserves.

Some advice on how to go about things if we go this way would be really appreciated.

TIA halobap

You need to consider the term and the interest rate e.g. linked to the variable rate of the Halifax Building Society and what options to pay off early.

The mortgage will need to secured on the deeds in the usual way by a Charge Certificate, which will cause problems if there is any other mortgage provider to the property.

There is also the inheritance tax aspect as the mortgage capital remains part of your estate and the income tax that you might have to pay on the interest.

Could he take out the mortgage and you provide a regular payment out of income to pay it off?

[johnhemming]

the problem in this situation is a family one. If he does not pay will you evict him? otherwise you need to accept that if he does not pay there is not a lot you can do.

[halobap]

Thanks for your useful reply supremetwo.

Yes, term, interest rate & early repayment are in our thoughts and will be documented.

Luckily there wouldn't be any other mortgage provider involved. Thanks for the heads up on a Charge Certificate.

We'll have to look at the consequences to inheritance tax, thanks.

We are considering this because we think he might have difficulty obtaining a mortgage.

[Lootman]

We are considering this because we think he might have difficulty obtaining a mortgage.

What is it about his circumstances makes him seen as a higher risk borrower? Isn't there is a risk to you here? And unless you intend to foreclose on him if he defaults on a payment, then you are in a bind in that case.

Bearing in mind the IHT issues already raised, a gift to enable a purchase might be better. That is the route I took with my kids - I gave them each enough so they could buy a home with a mortgage that was less than half the value of the property. This means that a normal mortgage was easy to get and had a lower rate. And after 7 years the value of those gifts is exempt from IHT and no longer deemed a part of my estate.

[halobap]

the problem in this situation is a family one. If he does not pay will you evict him? otherwise you need to accept that if he does not pay there is not a lot you can do.

johnhemming thanks for your reply.

If he didn't pay then he would have a very good reason, we have no cause to mistrust him and would have the house as collateral. We will not see our son homeless except in very extreme circumstances.

[halobap]

What is it about his circumstances makes him seen as a higher risk borrower? Isn't there is a risk to you here? And unless you intend to foreclose on him if he defaults on a payment, then you are in a bind in that case.

Bearing in mind the IHT issues already raised, a gift to enable a purchase might be better. That is the route I took with my kids - I gave them each enough so they could buy a home with a mortgage that was less than half the value of the property. This means that a normal mortgage was easy to get and had a lower rate. And after 7 years the value of those gifts is exempt from IHT and no longer deemed a part of my estate.

He is single and has recently had a health scare, as yet we don't know if this will become a permanent problem. He has always been a reliable hard worker but on a single wage the mortgage he could take out normally would be rather less than he'd need.

As you say a gift to him to enable a purchase might well be a better way to go.

Thank you Lootman, food for thought.

[robbelg]

A simpler option might be a guarantor mortgage.

First google result

https://www.money.co.uk/mortgages/what- ... rtgage.htm



Rob

[halobap]

A simpler option might be a guarantor mortgage.

Rob

Thank you robbelg, we will investigate your link.

[johnhemming]

If he didn't pay then he would have a very good reason, we have no cause to mistrust him and would have the house as collateral. We will not see our son homeless except in very extreme circumstances.

In which case I would think it should be OK.

To be fair if you end up as guarantors you are in a similar sort of situation.

I have guaranteed things for family members beyond my immediate family, but I accept the implicit high level of support and obviously I know them well. It is an entirely reasonably thing to do and obviously there are issues relating to taxation etc. However, you need to be clear about what might happen and accept that risk at the start.

[johnhemming]

As you say a gift to him to enable a purchase might well be a better way to go.

If he pays you interest he pays it out of his post tax income and for you it is a taxable income on which you are likely to have to pay tax.

[Charlottesquare]

One issue that you have no doubt considered is if there are siblings, if not such an arrangement re the family is relatively simple, if there are thought will likely be needed to ensure the others do not feel one is being favoured over the others.

I had such an arrangement with my own father a very long time ago, however it was more a stop gap scenario, lasting about two years, as against a permanent source of funding.

Family dynamics are often the most challenging part of such arrangements.

[Leither]

I agree with Lootman, outright gift is best, as you appear to be able to afford it. This is on the assumption your son would inherit anyway and reduces your IHT assuming you live long enough.

Regards,

Leither.

[Mike88]

I agree with Lootman, outright gift is best, as you appear to be able to afford it. This is on the assumption your son would inherit anyway and reduces your IHT assuming you live long enough.

Regards,

Leither.

Outright gift is not necessarily a good idea. What would happen if the son married, had children and then divorced meaning the wife could be entitled to a significant share of the equity? What if the son was irresponsible and decided to sell the property and blow the proceeds? Of course we don't know the circumstances of the son but I would be very reluctant to give away a huge sum of money as that could lead to consequences that are impossible to predict.

[Howard]

I agree with those who suggested making a gift.

Mrs H and I were in the same situation as you, Halobap. In our early sixties we gave our children substantial gifts, enough to fund the major part of a house each. We took the risk of divorces, squandering of assets etc. and made no conditions.

In our experience this has proved very positive. Our relationships with our children and their spouses have been most rewarding. Especially now we have grandchildren. Who knows, it may be that our gifts were a factor.

Now more than seven years later, it looks like a very good decision and, of course, unlike complicated legal agreements it involved no extra costs.

regards

Howard

[Leither]

I agree with Lootman, outright gift is best, as you appear to be able to afford it. This is on the assumption your son would inherit anyway and reduces your IHT assuming you live long enough.

Regards,

Leither.

Outright gift is not necessarily a good idea. What would happen if the son married, had children and then divorced meaning the wife could be entitled to a significant share of the equity? What if the son was irresponsible and decided to sell the property and blow the proceeds? Of course we don't know the circumstances of the son but I would be very reluctant to give away a huge sum of money as that could lead to consequences that are impossible to predict.

Those are risks you just have to face. We’ve given away considerable sums to both married children and, whilst we believe both children and their spouses to be responsible adults in loving, stable relationships, you can never forecast the future. Being able to make both families much more financially secure brings us huge pleasure, far more than spending the money on ourselves.

Regards,

Leither.

[halobap]

Thank you everyone who has added to this thread with various things to consider. I think we now have plenty of food for thought and can make a plan of action if we help him out.

I hadn't realised that Lemonfool existed after Motley had gone by the wayside, so pleased to see some familiar usernames on here. No doubt I will be back before long to receive more expert and considered advice. Thank you for existing Lemonfool