Buying my parents house to save them from homelessness

Bill_Payers · 9 July 2017 at 10:16AM

My elderly parents bought their current home in their late 50's with an interest only mortgage of £130,000. Now at the age of 78, the mortgage term is due end next year, and they do not have savings to repay the debt. As a consequence they are faced with having to sell their house to repay the debt. Their income is limited to the state pension, they have no savings or any other form of income. They do not have sufficient equity in the house to buy another home, they equity they have is only sufficient to pay rent for about 8 years at current market rental rates. Faced with them potentially being homeless at the age of 78, I am considering taking out a mortgage to pay off theirs, and buy their house so they can live in it rent and mortgage free for the remainder of their lives, giving them the piece and security they need and deserve. I can only afford to take out an interest free mortgage of £150,000, with my repayments being around £400 per month (estimated). Their house is valued at £250,000, so they have agreed to sell it to me for £150,000, as I will be responsible for the mortgage payments, and they will have no rent or additional costs. Can anyone advise what potential pitfalls I might encounter such as issues with inheritance tax, stamp duty legal implications etc. I have limited savings myself so could not deal with any unforeseen large bills from the taxman if they were to arise. Whilst I am keen to help my parents out, I am also a home owner myself, with an average income, and 4 children, and want to avoid any big financial pitfalls that might impact on my ability to pay my own bills going forward. As I will not be asking my parents to pay rent, I assume that I will not be liable for any income tax that might otherwise result from a rental income on a second home. I am a naturally cautious person, with limited financial knowledge, so whilst this appears to be the right thing to do, it is also a very scary prospect, so any advice casting light on potential pitfalls will be very welcome.

AnotherJoe · 9 July 2017 at 11:00AM

If parents need to go into care at some point, this may well look to the council (even though its not your intention) like an obvious ploy to get out of selling the house to pay for care home costs (esepcially since itw as sold under market value by a huge amount) . So they may demand the money back so this will have been pointless.

I believe you would need to pay an extra 3% SDLT on the deemed market value (not the sale price) as it will be a connected transaction. So thats £10k in total, not £2,500.

Interest only loans are quite difficult to get these days, so your scheme may not work anyway.

Can your parents not downsize to a substantially smaller place - a 1 bed flat in sheltered housing maybe? If they did, once their money ran out, they would at least be eligible for housing benefit and similar benefits which they never would in your plan, you in effect would be providing benefits instead of the council, can you afford that given your financial circumstances?.

TonyMMM · 9 July 2017 at 11:07AM

Apart from the obvious question of ...What plan did they have to repay the capital when they took the mortgage out ?

Have they approached their current lender to see if the current mortgage can be extended ?

As far as the purchase goes ... loads of issues (too many to list) .... what if they need funded care in the future (look up deprivation of assets), higher rate stamp duty to pay, CGT for you on any gain, no security for them - what if you go bankrupt/get divorced (their house is then part of your assets) ...the list goes on and on.

You will be their landlord, whether you charge rent or not.

boliston · 9 July 2017 at 11:15AM

I would imagine the cost of a commercial mortgage for a second home would be a lot more than a standard owner-occupier mortgage.

Thrugelmir · 9 July 2017 at 11:31AM

Bill_Payers wrote: »

I can only afford to take out an interest free mortgage of £150,000, with my repayments being around £400 per month (estimated).

Unfortunately affordability is going to be your issue. Days of interest only mortgages are over as well. Suggest first you meet with the lender with them and ascertain if there any options. If your parents can afford to repay any of the capital on a monthly basis this would at least start to minimise the impact of any rise in interest rates. The solution most likely requires a difficult decision to be made.

Bill_Payers · 9 July 2017 at 12:42PM

Wow, thanks to all who replied, a lot more to consider than I had first thought! Ref: (What plan did they have to repay the capital when they took the mortgage out ?), my father remortgaged the house to start a retail business in his late 50's believing he could eventually sell it and repay the mortgage that way. He was strongly advised against this but did it anyway. Unfortunately the business plan was flawed and the impact of online retailing hit him very hard. The business was placed in to voluntary liquidation and he had to use all of his savings to repay debts leaving them solely reliant on their state pension. Good suggestion ref asking current lender to extend, I'll ask them to arrange a meeting. They will have around £100K left after the sale, the cheapest houses/flats in our local area (Cambridgeshire) are significantly higher leaving the option to downsize out of their reach. Ref (I believe you would need to pay an extra 3% SDLT on the deemed market value (not the sale price) as it will be a connected transaction), which authority should I contact to check if this is correct? Based on this feedback the plan is looking a little flawed and it looks like we will have to explore other options. Thanks for the great responses, they have been very helpful and enlightening.

AnotherJoe · 9 July 2017 at 1:34PM

Bill_Payers wrote: »

Ref (I believe you would need to pay an extra 3% SDLT on the deemed market value (not the sale price) as it will be a connected transaction), which authority should I contact to check if this is correct?

Its a general principle otherwise tax evasion would be a breeze. Here's a couple of examples.

http://www.telegraph.co.uk/finance/personalfinance/tax/11880518/Im-buying-my-parents-house-if-they-sell-it-cheaply-will-it-cut-our-tax-bill.html

https://www.property-tax-portal.co.uk/taxquestion70.shtml

Bill_Payers wrote: »

They will have around £100K left after the sale, the cheapest houses/flats in our local area (Cambridgeshire) are significantly higher leaving the option to downsize out of their reach.

OK so they are in a house with £100k of equity worth £230k,what is it a 2 or 3 bed house? Are there no one bed flats/maisonettes at say £150k , if a house with more bedrooms is £230k??
This would leave you taking out a £50k mortgage, which you could much easier afford, at present you are trying to buy the the same as they have now, which neither you nor them can afford.

You'd extend the mortgage on your current house and then LOAN them the £50k which you'd get back when their house was sold (they woudl be cash buyers). You'd document the loan and take a first charge on the flat so that your equity was protected if it was sold. Then there is no extra 3% SDLT as you are not buying a second house they are buying it.

amnblog · 9 July 2017 at 2:28PM

Hi Bill.

There are a few potential ways to tackle such a situation.

Your parents can look to take a 'lifetime mortgage' secured on the property on which payments are rolled up to to settled on sale after their deaths.

They may not have sufficient equity to clear all of the current £130,000, so you many have to raise some of the total from other means (perhaps against your own property - be careful, as a plan like this, an average income, and 4 kids are poor bedfellows).

They could sell to you for a reduced price (designed) to clear the loan, but there are a number of implications to this that need to be discussed. Of course, unless you have cash you need to raise funding yourself for that.

Your parents may well find that their lender will give them a little longer, perhaps 12 months, to settle the current lending (if they are putting in place plans to deal with this issue).

The important thing is for you and your parents to get some advice from a suitable mortgage broker.

boliston · 9 July 2017 at 3:33PM

i would be very wary of a lifetime mortgage as it can make selling or moving very difficult - i would probably go with a rental option as no point in tying up capital at that age - i would rather have the money to enjoy my retirement!

TrickyDicky101 · 9 July 2017 at 4:22PM

The SDLT is only ever charged on the consideration of the transaction - so in the scenario outlined by the OP that would be on £150k. Connected persons rules are applicable for CGT purposes.

Jkbc90 · 9 July 2017 at 5:32PM

I have no advice but I really hope you find a way to make this work, good luck.

Buying my parents house to save them from homelessness

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