What rate of interest to charge in this case?

bluewater

My father died 20 years ago and he and his partner owned their house as Tenants in Common. His Will stated that his partner could remain in the house for the rest of her life, and if she wished she could move and the arrangement would continue. She has moved once and wishes to do so again - this time to buy a retirement flay (she is now 84). The current property is owned jointly by me and her but my solicitor has advised that it would be better if this time she purchased the flat in her sole name with me providing a loan (£75,000) with a Charge over the new flat. This advice is based on his view that retirement flats are notoriously poor investments. After her death the flat will be sold and the loan repaid with interest. The question is what rate of interest? Presumably it would be something over the bank base rate. I thought my solicitor would have a view on this but he has asked me what I have in mind! Any help would be much appreciated.

CLAPTON

so you are giving up an share of the equity for interest on your 75k ..is that right?
who will get her share when she dies?

Rafter

I would suggest a fair rate of interest would be the interest charged on lifetime or equity release mortgages. Given her age you could look at the interest rate on 5 or 10 year mortgages for example.

Although I understand where your solicitor is coming from, I'm not sure whether your dads partner is under any obligation to agree to such an arrangement. The beneficiaries or her will might also be upset to find that there is very little equity left if she lives a long time in her retirement flat and could challenge whatever agreement you signed.

It would also seem very unfair to suddenly start charging interest on your share, when that is not what your father intended or in the terms of her will.


Another option for you to consider is to perhaps link your investment to house price growth.

So if your 50% share is currently worth £75k and the average house price for that region per the nationwide house price index is currently £150k that is your start point.

If house prices stay the same, but her flat sells for only £125k, you could then preserve your £75k leaving her beneficiaries with £50k.

Depending on the wording of the will, and presuming that the retirement flat is worth less than the cost of the house she is selling, presumably you receive some sort of distribution?

Good luck

R.

bluewater

Thank you very much for your detailed reply Rafter. I will certainly look at lifetime and equity release mortgage interest rates as you suggest.
You are right that she is under no obligation to agree to this. Indeed the Will says that the property should be owned jointly. However the Will makes other stipulations that have not been adhered to so it doesn't seem to be cast in stone.
When she dies and the flat is sold and the loan repaid - if the interest on the loan repayment is greater than the increase in the flat's value I can understand her beneficiaries being upset. But could they really challange something they had agreed to? If the flat increases in value over and above the loan interest they would be smiling.
Linking the loan to the house prices index for the area is an interesting idea but I'm not sure how practical it would be to incorporate into the Charge.
The house is to be sold for £250k and the flat is £150k so there will be a distribution of what's left over.