Am I crazy?

Adlibjac

I would appreciate your thoughts.....

I have a lot of money tied up in savings bonds earning approxiamtely 3%. I am nearly 50. I need the interest but can happily leave the money long term.

My son wants to buy his first house and has been offered a mortgage of 4.99% on a 5 year fix. He has a good deposit and a secure job. It seems silly to pay interest to a bank at this rate when I get less for my savings.

So.....how about I lend the money to my son and be his mortgage provider? I charge interest at 3% and knock off extra payments against the capital borrowed.

Could a solicitor draw up a contract like this? Mainly I would want to protect the property against a claim from a future spouse if I still had an interest.

I trust my son completely. I am very financially savvy (former company director) and would only be lending about 5% of my net worth.

I know there would be many cons but are there more pros?

Anyway your advice would be appreciated. It is only a vague idea at the moment.

Yorkie1

The fact that you say you need the income from the interest, means that you need to consider how you will protect your own position if things don't go to plan.

Some things to perhaps consider: if your son loses his job and cannot repay the loan, what action would you take? If interest rates go up (and they will), how and when will you recalculate them so as to be fair to him and yet maintain the value of your income?

Will you replace the mortgage provider completely? If not, the loan will have to be declared and will impact on his affordability criteria for the official mortgage.

Edit: sorry, just realised I mis-read your question. Thought you were asking for cons!

Adlibjac

when I say I 'need' the interest I mean I am not planning to 'give' the money to my son (I have 2 other children). I am currently receiving 3% interest and do not want to be out of pocket.

I have considered the situation of his being out of work but he is a teacher so pretty secure.

Worst case we could rent the house out and he could move back home if he was in dire straits but that is a worst case scenario!

Thrugelmir

The interest element of the loan repayments are taxable in your hands.

So the actual amount you'd need to charge to maintain your 3% net would be 3.75% if you are a basic rate taxpayer, 5% if you are a higher rate one.

If interest rates in the future will you charge your son more interest?

Suggest you also you review your own accounts as it possible to obtain a better rate than 3% net.

dimbo61

Have you looked at the YBS offset mortgage with " family and friends" that way you can help your son and still have control of your money

The_Palmist

You can get up to 5% in bonds if you search a bit.

Why not buy this property as an investment and rent it out to your son, with an option to buy later.

Collie_Collie

A good bit of advice I was given about lending money to family or friends is don't and if you do, you must, in your mind, absolutely give the money to them.
Obviously don't tell the person you are doing that
But the quickest way to ruin a relationship is to lend the person money. If you sincerely, privately don't expect it to work out you may be OK.

You should consider if you can do the same for your other children and what subtle pressures you will be putting onto any relationship or children your son may have.

Sorry, this sounds such a good idea but so easily slips back into cons.

Cat2011

My parents and I have done exactly that. We had a mortgage contract drawn up by a solicitor stating the amount owed, over 25 years, at 2%+base rate of interest, signed by both parties with witnesses. There is also a legal charge on the property, also drawn up by the solictior, where if for any reason the house gets sold, my parents get x amount of money out of the sale before anything else is considered. This protects their investment.

I opened a joint account in both mine and my dad's name in which all the rent and some of my salary gets paid into, and all the bills and the mortgage gets paid out, so the finances of the house are very clear.

We've had this in place for a little over a year now and it's gone smoothly so far. One thing to consider is if your son can afford to pay you monthly mortgage payments+interest! I hadn't a hope in hell of affording the mortgage on my own so rent out some of the rooms in the house, between the rent and my income I can afford the repayments.

With reference to siblings, my parents umm'd and ahh'd about the effect on my 2 brothers. But one lives in (central) London so will probably never buy, and the other still lives at home (spoilt!). I'm also probably the only one sensible enough to run the "rental business".

Only you know whether your son is reliable enough to make the repayments. I would definitely get everything properly drawn up and signed, making sure both of you know exactly what is expected of each other. Don't accept "Yes, yes I can afford it Dad" ask him to draw up an extensive budget.

I don't know how anyone gets on the ladder without parental help. I'm eternally grateful to my parents for helping me!

Collie_Collie

You make many good points Cat2011. Maybe it was just in my family it didn't go so well - although on a couple of occasions a helping hand didn't cause problems.
Depends on the people and circumstances I guess.