Providing a personal mortgage to child

artha

We are considering lending our daughter the money to buy a house outright i.e effectively giving her a 100% mortgage over 25 years.

I initially thought that this would be much easier and cheaper for her and a way of us protecting some of our capital from inflation erosion in our retirement (I'm 59 and retired, OH is 55 and possibly retiring in 4-5 years)but I'm now not so sure.

I haven't thought too deeply about this but just wondered whether anyone else has done this and has any advice on what needs to be done and considered.

As a starter, If we were to lend her 125K for a starter home, what would we have to ask in repayments/month to ensure we got inflation protection and a return of the capital over the 25 years. . I realise that things are going to vary over that 25 year period but for the sake of simplicity let's assume that we need a 4% return on capital.

The main concern I have is that if either me or OH needed care home funding how would this arrangement impact on that situation

DVardysShadow

Good grief. A highstreet mortgage does not give 'inflation protection' to the lender at least not in the way you seem to suppose. If you achieve that with a mortgage, she will be better off with a highstreet mortgage. It certainly will not be cheaper for her. Your best bet is to give her a mortgage which matches the terms of some mainstream product or some industry index, but with a discount.

artha

DVardysShadow wrote: »

Good grief. A highstreet mortgage does not give 'inflation protection' to the lender at least not in the way you seem to suppose. If you achieve that with a mortgage, she will be better off with a highstreet mortgage. It certainly will not be cheaper for her. Your best bet is to give her a mortgage which matches the terms of some mainstream product or some industry index, but with a discount.

That's what was confusing me when I looked at the rates available from a mortgage lender if she could get one without a massive deposit. How do mortgage lenders make money then if they are offering interest rates and loans cheaper than I could when I only expect the money I lend to keep pace with inflation in returns and not make a "profit"

botchjob

Why not just gift her the deposit (with arrangements for it to be repaid at some future point if that's what you need) which will then allow her to get a competitve mortgage that having a good deposit will allow. She'd get a better rate than 4% and you get to keep the bulk of your savings.

And she also (largely) gets to be in control of her own finances, rather than being in debt to her parents for the rest of her adult life.

Person_one

artha wrote: »

That's what was confusing me when I looked at the rates available from a mortgage lender if she could get one without a massive deposit. How do mortgage lenders make money then if they are offering interest rates and loans cheaper than I could when I only expect the money I lend to keep pace with inflation in returns and not make a "profit"

Lenders don't expect to keep up with inflation. They expect their money back plus interest. They make a profit because of the volume of mortgages they give. They are starting and finishing every day, providing a steady stream of income.

I don't think what you are suggesting would actually be helping your daughter out at all. You'd be better off lending her the deposit and letting her find a decent deal elsewhere. There's less potential for rows/hurt feelings/problems further down the line as well.

poppysarah

https://forums.moneysavingexpert.com/discussion/2568939

read that too

DVardysShadow

artha wrote: »

That's what was confusing me when I looked at the rates available from a mortgage lender if she could get one without a massive deposit. How do mortgage lenders make money then if they are offering interest rates and loans cheaper than I could when I only expect the money I lend to keep pace with inflation in returns and not make a "profit"

The answer lies within your question. The lenders do not lend their own money, so they can make huge profits on tiny capital. They get their capital from the likes of you and don't pay you what they get on it.

jockosjungle

I suppose you'd have to do some deal linked to an inflation index, don't forget you'd need to pay tax on the interest you received on the money. If you're doing it to help your daughter, perhaps charge her similar that you might get in a bank, if you're doing it as some sort of good investment your daughter would be better off going to a bank

R.

talulahbeige_2

I'd be more concerned about what happens when you retire in a few years and need your savings that your daughter hasn't yet re-paid.
Obviously not an issue if you have lots more in the bank tho

Richard_Webster

Also as a loan it would be an asset of your estate when you die and included in any IHT calculation.

You could gift her the cash and she could mysteriously make random lump sum cash payments of varying amounts and in varying frequencies to you which over time in total were roughly equivalent to the interest you would have wanted had it been a loan....

artha

Thanks everyone for taking the time to post the useful replies. I need to digest these thoughts and will hopefully post again to continue this discussion which I assume may be useful to the many people who might be in my position. i.e. trying to help their children on to the property ladder without compromising their own futures.