Paying off mortgages

flowerpower123

Hi
This is the first time I have used this site so here goes.
Lots of goods ideas around.

My mother has come up with an idea to help her 4 children pay off their mortgages early and I would like some views as to whether you think it would work, is the best way forward or not.

Each family (total 5) would pay £50 per month, my mother would start it off with a lump sum of say £4000. The lump sum and then £250 per month (5 x £50) would be paid into one families mortgage until it is paid off, reducing the mortgage quickly. When their mortgage is paid off, that particularly family would increase their contribution to say £100 per month (as they are no longer paying for a mortgage) and these monies are then paid into the next families mortgage thus reducing theirs, and so on.

I quite like the idea of clubbing together to help each other but a couple of things arise such as whose do you pay off first, the shortest as it will be over quicker? What order do you do the rest in - age of children, length of mortgage eg: quickest first or amount?

Hope this makes sense. Any some ideas or views would be appreciated.
Many thanks

regularsaver1

its ok but who fights for theirs to be paid off first - and how long will it take to pay the first off?

stphnstevey

Very tricky!

Best not do business with family - if it all goes to pot, quite often the family will as well. :eek:

Cara79

I would tend to agree with other posters. This is asking for trouble. There are so many problems that could be encountered in the future. I would steer clear. I like Al Mac's idea of the lump sum being split 4 ways and then each family working on their own mortgage to pay it off.

Good luck

Ian_W

I also agree with the other posters but it seems quite impracticle as well, unless all 4 mortgages are the same size and no family intends to up or down size whilst all this is going on.
Without wishing to sound offensive your mother could be viewed as a bit of a control freak especially by in-laws. If my MIL wanted to contribute a lump sum conditional it was used to pay off the mortgage, fine, thanks very much. If she suggested a scheme like your mum has I'm afraid it would be, thanks but no thanks! We run our lives, manage our debts etc - it's all part of being grown up and independent.

aloiseb

All well and good provided everyone involved stays together and never has any sort of financial complications or crises - and what are the chances fo that happening, even in the best-regulated families?!!!

I think you should tell your mother that you would only consider this if you can get a family solicitor to draw up a proper legal document for the whole thing, and have everyone sign it.
(and maybe this could be a graceful way out, if you can't actually find a reliable solicitor prepared to do this!)

jamesd

There's an approach that is easier and "cleaner" if the mortgages allow overpayments or offsets. Each family could deposit in the overpayment or offset and be reimbursed at mid way between their normal after-tax savings interest rate and the mortgage rate. This way the mortgage payer pays less interest and the families depositing the funds get higher interest. The interest payments can be tax free gifts from the mortgage paying family to the others.

The pre-tax interest rate used should be no lower than the best instant access rate given on this site. Otherwise the families who may do the overpaying could lose out instead of gaining. Assuming 5.15% interest gross, a basic rate tax payer would be earning 4.08% and higher rate 3.09% on a normal savings account. If the family member has a mortgage, their own mortgage rate should be used because that's the rate they could "save" at.

If the mortgage is at 4.5%, a basic and higher rate tax payer with no mortgage each contributed 10,000 and one with a mortgage at 4.3% contributed 10.000, here's how it would work out:

Basic rate payer: paid (4.08 + 4.5) / 2 = 4.29% (equivalent to 5.36% gross) or 429 for the year. Is better off by 21.

Higher rate payer: paid (3.09 + 4.5) / 2 = 3.795% (equivalent to 6.325% gross) or 379.50 for the year. Is better off by 70.50. This is more than the basic rate person but remember that the mortgage payer is also gaining more - by paying a lower interest rate of 3.795% than the 4.29% paid to the basic rate payer. The tax people are the ones who are losing money here and we're probably all happy for them to lose money.

Mortgage at 4.3% payer: paid (4.3 + 4.5) / 2 = 4.4% (equivalent to 5.5% for basic rate payer) or 440 for the year. Is better off by 10.

Mortgage being paid off member: saves 4.5% on 30,000 = 1350. Less 429, 379.50 and 440 paid to family is better off by 101.50.

This scheme has the big advantage that all clearly benefit from day one and any participant can stop or start at any time. The family gains most benefit by paying to the highest rate mortgage first. It's easy enough to calculate monthly interest rates for various periods, just ask here and someone will work out the appropriate interest for any period and deposit amount.