Buying from Parents

Rebeljuice

Hi everyone.

My parents were late buyers in the property market and took out their first mortgage for 39K around 5 years ago. The house is now worth around 115K so despite not having had the mortgage too long they have a nice bit of equity.

Unfortunately, due to ill health and unemployment (and some pretty bad mismanagement of their finances) they are in some considerable debt of which none is secured on the house. Obviously this has become a stress on their lives.

They have recently been talking of selling the house and moving into rented accommodation. This will clear all their debts and leave some left over cash to enjoy. However, it will also mean moving house.

I am wanting to buy their house so that they can continue to live there for as long as they like whereby they pay rent to the value of the mortgage repayments (naturally Im not interested in making any profit from them). Is this a complicated transaction or is it as simple as it sounds?

Obviously, this isn’t an ideal situation for them but it is vital that we find a way of clearing their debts asap as the old man is coming to the end of his contract at work and, without the income, will find it impossible to make both the mortgage payments AND the debt repayments resulting in extra stress which he doesn’t really need right now. Although they would like to keep the house, the bottom line is it does have to be sold to get out of the mess they are in. If I buy it at least it can stay in the family and they can continue to live there for as long as they require.

I would be grateful for any ideas and thoughts from anyone who has bought from their parents or knows of the snags and difficulties it may entail. Would I be buying to let seeing as they would be paying the monthly mortgage amount? Are there hidden taxes involved in buying and selling between family? Do I treat it as if I am buying from a stranger and independently apply for a mortgage, or go through the folk’s current lender and explain exactly what it is we are doing?

As an aside, I would be a first time buyer but my salary well covers the mortgage required and I am completely debt free. Unfortunately, my credit history is pretty dire due to past misfortunes and naïve money management. It just stays on your record for so long after the fact!

Ian_W

Hi Rebel,
It's a pretty nice thing you're trying to do for your folks. Bottom line though is it's also pretty complex and I wouldn't be sure if it's totally feasible.

I take it you don't live with your parents from the post? If not a normal residential mortgage wouldn't be available, a BTL would seem more appropriate but they are usually 85% or so LTV. Another complication is your credit history which won't help with mainstream lenders and may mean higher interest rates. All these types of things add to the complexity.

A good starting point may be a local mortgage broker. You can find one via https://www.unbiased.co.uk simply by entering your post code. You need to establish that they deal with the whole of the market, not simply a panel of lenders and how they will charge you - an up front fee [how much?], commission from a lender or a combo of the two. Normal advice is to get one who is fee free but in this case, being complex, it may be worth a fee for them to do the work to establish if you can get a lender.

BoL, hope it works out.

rizla01

Could you not lend them the monthly payments (Set up a direct debit from your bank) to help them out of their problem and get them to agree to you putting a second charge on the property, for the full amount, to cover yourself?

Rebeljuice

rizla01 wrote:

Could you not lend them the monthly payments (Set up a direct debit from your bank) to help them out of their problem and get them to agree to you putting a second charge on the property, for the full amount, to cover yourself?

Im not sure what you mean? A second charge on the property?

Rebeljuice

Thanks Ian. Youre right, I dont live there. So does that automatically mean that I will have to get a buy-to-let no matter what?

Thanks for the link. I'll check it out.

Ian_W

Generally, yes. If you own & have the mortgage but don't live there, the lender hasn't got the same rights in terms of repo if you default. Hence BTL's have a slightly higher deposit and interest rates as they're more risky for the lender.

A second charge is effectively a second debt, after the mortgage on the prop. I'm not sure it's as easy as all that and think the mortgage co may have to agree. However lending them the money w/o a 2nd charge may be an easier option.

silvercar

I don't know your age or the ages of your parents. It may seem a good idea to help them out now, but what happens in 10 (or even 20) years time. Your parents may have retired and have a smaller income. You, on the other hand, may want to buy a property of your own, you may even want to settle down and have children on your own. How easy will it be to buy a property of your own when you have the commitment of your parents home?

rizla01

'Putting a charge' on a property is a perfectly normal procedure to ensure that in all eventuality, you will get your funds from the sale of the property. The first charge will always be held by the Mortgage Company and they do not need to be asked first. They will however normally be notified, by you. during the course of the legalities.

If someone other than the mortgagor, sues your parents for a debt they are able to insist on a sale of the property in order to recover said debt. However, if you (or anyone) has a charge on the property then the amount that they can recover is limited to the amount of equity in the property AFTER the first two charges have been deducted. It also covers you if they were to die intestate or if anyone were to contest a will.

It is a simple procedure NOT needing the services of a solicitor except, perhaps for advice (Which you can get on here, as I did). It guarantees your monies are safe. Unless the debt owed to the first charge (Mortgagor) exceeds the equity left in the property at the time of disposal.

I have just done precisely this to the tune of 20k.

rizla01

silvercar wrote:

I don't know your age or the ages of your parents. It may seem a good idea to help them out now, but what happens in 10 (or even 20) years time. Your parents may have retired and have a smaller income. You, on the other hand, may want to buy a property of your own, you may even want to settle down and have children on your own. How easy will it be to buy a property of your own when you have the commitment of your parents home?

Simple!

Provided your funds will cover the payments it would be very easy to raise funds against the equity already owned. Investors do it all of the time.

Rebeljuice

Thanks everyone...

Still not sure which way to go about this. Theres a few options on the table. I cant really take into consideration what happens in 10 or 20 years time as this is an issue right now that needs resolving. The bridge will be crossed when we get there, to coin a phrase. But for now its a case of freeing up the equity in the house without remortgaging and trying to ensure they dont have to move out...

TheTraveller_3

Hi Rebel,

Sorry to hear about your parents predicaments. For many reasons this is a very complex situation and I feel it is imperative your parents seek advice as a matter of urgency.

Regarding you buying their property from them using a BTL mortgage, I could be wrong however based on the limited facts, I don't feel this will be doable/advisable.

Generally BTL mortgages require that a property be let on a shorthold tenancy agreement to an unrelated party. Also in the event of long term sickness/unemployement you need to check very carefully with your local council whether your parents would be entitled to housing benefit it renting a property they formally owned from a family member. Amongst other things, I believe they will have to prove they would have been repossessed if they didn't relinquish ownership. If you don't meet this criteria it puts you in a high risk situation of having to meet the mortgage payments without any rental income coming in.

I'm guessing from your post that shuffling their current unsecured debts to cheaper rates/longer term isn't possible due to your father coming to the end of his contract. His he likely to find further employment? If so would their incomes allow them to support all their liabilities if they were restructured? If the answer to this is yes then you could consider helping them out financially until they are in a position to restructure (but make sure you make any payments directly to the creditors and use a second charge in the event the worst happens - and take legal advice).

If once back in employment, their income are not going to be sufficient to make debt restructuring affordable long term, then I unfortunately I fear they may be better off selling up and making a fresh start however before making this decision they should contact one of the free debt counselling services mentioned at the bottom of this link to see what options are available.

As temp measure they may also wish to immediately transfer their mortgage to interest only if they haven't already done so.