Private mortgage advice please

ClaireN75

I'm looking for some advice on a rather specific situation with a "private mortgage". I'm not in the UK, and what is being suggested is ok within the local (tax) laws but I'm really in two minds and would appreciate outside opinions to help me fully see the pros and cons. I also say "I" but ultimately it will of course be a joint decision taken between me and my husband (and his parents). This might be a bit long so thanks for bearing with me.

My husband and I are buying the flat we currently rent. It belongs to my parents-in-law and we pay £500 per month plus £100 management charges. We have agreed a price for the purchase (which I have no problem with) and his parents will 'lend' us the money at a low or zero percentage interest rate. Our repayments will act as some sort of pension for them. They've currently been retired about 5 years.

We have up until now been thinking about this as a standard mortgage so suggested paying £1800 per month to the parents-in-law so that we would pay back the loan within the next decade. We can afford this repayment without any difficulties. But this morning in the shower I was wondering if we should treat it rather as an income for my parents-in-law and go for a lower monthly payment so we can keep saving at a higher rate (for children, a house and other projects we have in mind over the next few years).

In this scenario if we move we will most probably keep this flat and rent it out to partially cover the repayments to the p-i-l, giving us some flexibility for a commercial mortgage (strict laws here on what percentage of your total salary can go towards loan repayments here). We have already saved a pretty good deposit and we're intending to keep on saving over the next few years.

If we maximise the repayments we would probably need to sell before buying if we decided to move in the next few years, which we probably will do.

Of course we need to discuss what repayment level the p-i-l would be happy with but if they are happier to go lower am I missing some big negative for us? Am I wrong to be thinking of this as a glorified rent? Should I keep my hard head on and keep the repayment term at a minimum?

Thanks for bearing with me this far and for your thoughts and opinions! :cool:

CloudCuckooLand

Minefield.

Who owns it, when? Do you get 100% immediately, in which case how do the p-i-l protect themselves from, for example, you/husbands divorce/death/unemployment?

Or do the parents own it until you finish paying? In which case, how do you/husband protect yourselves from p-i-l changing minds/divorcing/dying etc.

What if your p-i-l die sooner than expected? Are there siblings/other heirs that will expect the lump sum for the flat to go into the estate, so they get their 'share'?

Are there UK-style inheritance tax laws, or laws similar in effect, that the disposal of the asset could fall foul of, on their death?

What if property prices suffer a reversal when you want to sell to move on, so you don't have enough to finish paying off the p-i-l ?

Etc, etc.

Lovely idea, but imo money and families don't mix. You have a deposit? Take it and get a proper mortgage, buy it from them properly. They can discount you a chunk of the price if they wish to offset the mortgage interest as a gesture.

Annisele

You need advice from a local lawyer. CloudCuckooLand has given you a nice long list of potential pitfalls, but as he said with his "Etc, etc" there will definitely be others - some of which people familiar with UK law are unlikely even to think of.

"OK within the (local) tax laws" - as in, it's legal - and "an efficient way to deal with the local tax laws" may well be very different beasts. For example, your p-i-ls may end up getting taxed on the £1800 a month you pay them (or not) depending on how you decide to structure your agreement.

ClaireN75

Thanks guys for your first comments. I have to admit I would prefer to get a commercial mortgage however this kind of arrangement is reasonably common here and the p-i-l so dead set against us and them 'losing/wasting' money that I'm pretty sure I'd cause a massive family rift. I do however want to make sure both my husband and I together, me separately in case of divorce and my p-i-l in their retirement are properly protected. Hubby and p-i-l are quite blase about the whole thing but having seen some of the stories on this forum I'm a bit more cautious. We have a local solicitor of course and I intend to get my money's worth from him (fixed solicitor's costs here for house sales - bliss, I know!).

Who owns it, when? Do you get 100% immediately, in which case how do the p-i-l protect themselves from, for example, you/husband's divorce/death/unemployment?

The deed transfer is handled in exactly the same way in which it would be with a commercial loan - an independent agency holds the deeds in trust. If we default they would normally chase us for the debt or repossess, but I need to find out how it works exactly in this case. In case of divorce our joint purchases are counted as being owned 50/50 under local laws. In case of death all assets will pass to the spouse, unless there are children (see my next comment). A separate contract from the purchase agreement will be drawn up to cover the loan, also by a solicitor, and the two issues are separate; that's to say, p-i-l are selling and we're buying and then co-incidentally they're lending us the money to purchase.

What if your p-i-l die sooner than expected? Are there siblings/other heirs that will expect the lump sum for the flat to go into the estate, so they get their 'share'?

The other sibling has signed his agreement to the sale. I believe the delta will be paid into the estate in case of the death of the p-i-l, but I need to clarify this with the solicitor.

Are there UK-style inheritance tax laws, or laws similar in effect, that the disposal of the asset could fall foul of, on their death?

Good question. If one or the other parents die 50% or 75% of the estate (can't remember exactly but the law is prescriptive) pass to the surviving spouse, the rest to the children. I don't believe that either my husband or his brother would seek to retain their share of the inheritance before the death of the second parent but I need to be clarify this with the solicitor.

What if property prices suffer a reversal when you want to sell to move on, so you don't have enough to finish paying off the p-i-l?

We're reasonably confident we won't have a major problem as we have a fair amount of cash as well as excellent credit, but you're right, this also needs to be discussed in more detail with the p-i-l.

"OK within the (local) tax laws" - as in, it's legal - and "an efficient way to deal with the local tax laws" may well be very different beasts. For example, your p-i-ls may end up getting taxed on the £1800 a month you pay them (or not) depending on how you decide to structure your agreement.

Totally right - my p-i-l have researched the tax implications but I personally haven't gone into it in detail. Apparently this type of loan (to family) is tax free but I have to admit, as this is not really my desired way of doing it, due to the potential pitfalls already mentioned, I'm letting them take their own responsibility for making sure they don't lose money on it.

I already had a long list of questions for the solicitor but I have a few more now too :T Thanks, and any other comments/suggestions (particularly on the debt repayment issue) are welcome.