Borrow from parents - tax and mortgage implications

patrick187

So here is my situation: 27 year old male

Sold flat at Christmas. I cut my losses, took a price of 11% below peak. I estimate that prices are at 15 - 18% below peak now. Considering buying another flat in the area now. In the meantime I moved back with the rents to save more deposit (£1k / month)

Salary = £41.5k (take home £2100 after pension and lease car)

Wishing to buy a 2 bed flat around £160k

Current deposit = £23k (+£1k for legal fees)

Leaves mortgage of £137k

Looking at fantastic Post Office 4.15% 5 year fix

I believe this is easily manageable (£734.53) but this sort of deal requires a 75% LTV. That equals another £17k deposit. Parents may be willing to loan me £17k (+ interest). Whilst this would be affordable I am not sure how I would proceed with this.

Can parents just loan a sum of this amount? do they then have to declare the repayment as income and therefore pay tax? Would I have to get it legally certified as a loan. Parents and I have good relationship and I could not contemplate defaulting on my parents!

Am I obliged to inform the mortgage company? Putting myself in their shoes, I would view the loan from my parents as being deductible from the amount of mortgage that they would lend me!

If the loan would not be suitable what would you advise as alternatives? Government home buy? Stay at home for another year? Parents acting as guarantor (at 27, the last two ideas make me sigh and probably my parents more so ) or just buy a much cheaper flat (which actually I would not do. I would rather rent a nicer place, particularly with the falling rent costs and ability to get 20% reduction on market value rent via work)

Thanks in advance:beer:

Pat

silvercar

You should declare a loaned deposit and that you will be repaying the loan with interest from family. The lender will reduce the max mortgage by the size of the repayments, so it will reduce the affordability.

Depending on your parents they may decide to gift it to you and any return considered voluntary. The gifted deposit should still be declared, but the optional repayment won't effect affordability.

Mrs_pbradley936

We provided the funds for our son to buy a flat, the total amount not just the deposit. Long story but he was originally going to university in Nottingham and we thought we would buy a house and he could rent out the other rooms. All going well until he decided to go to university in the South and the sums did not add up. BUT our accountant said to still buy a property in his name (local to us) let him have the rent as income and we pay the mortgage. At that time the mortgage was £360 and the rent £550.

Anyway we did that via a Deed of Trust which the solicitor drew up.

patrick187

Thanks silvercar and mrs bradley

silvercar - hopefully a loaned deposit will work in my situation as long as it does not reduce the affordability too much. Would the loan still have to be formalised via solicitors etc? I will get in touch with the lender.

On the subject of gifted deposits, i thought they were frowned upon by many mortgage lenders? I thought only a fraction accept them and those where they do they price in the risk through higher interest rates? If that were the case I may as well accept an 85% LTV mortgage and pay the higher rate.

Mrs pbradely936 - if you were paying the mortgage for your son's property and paying him the rent, was your son not subject to income tax? Do you have to pay income tax on gifts or is it only a possible inheritence tax liability? Perhaps it was packaged as a trust to avoid this?

silvercar

gifted deposits are frowned upon when they are from the builders as they are clearly an effort to inflate the value. From family it is obviously a different matter and the value of the property can be seen as genuine. More lenders are happy to accept family gifted deposits, though some won't. If your parents want the security of a charge on the property it will need to be sorted by a solicitor.

Mrs_pbradley936

patrick187 wrote: »

Thanks silvercar and mrs bradley


Mrs pbradely936 - if you were paying the mortgage for your son's property and paying him the rent, was your son not subject to income tax? Do you have to pay income tax on gifts or is it only a possible inheritence tax liability? Perhaps it was packaged as a trust to avoid this?

When he was a student he was not paying income tax and if we had given him £500 or more each month it would have been money that we had paid tax on so would have cost us more. That's why we pay accountants because we do not know all the rules. The money was a loan/gift and the terms between parents and son. Basically we will not ask for it back unless he turns into a junkie or a criminal but we can at any time.

He is working now and is not in receipt of the rent -we are and we are paying tax on the income. He could live there but he lives and works elsewhere. One more thing the flat is not mortgaged we put the mortgage on our own home because of the loan to value ratio.

Anyway, these things can be done but you need advice on your own circumstances. Good luck and let us know how you get on.