Buying a house for my brother - advice please

willow29

I was wondering if I could get some advice please about an idea Ive been mulling over. My brother has seen a house in the village we live in - it would need a very small mortgage approx £30K but as he is a student he feels that hes very unlikely to get approved for a loan. On the other hand I have an excellent credit rating and would be very likely to be approved so I was wondering if I could take a mortgage out in my name with him paying the monthly repayments and eventually owning the house himself. What problems can people forsee with this plan? Would there be tax impications for myself - could I been seen as having two properties in this case? Would i be able to simply put his name on the title deeds.
I really want to help him but also need to know what I could be getting myself into. Any help would be appreciated. Thanks!

G_M

1) you would own the house
2) you would not (I assume) live there so
3) you would be liable for Capital Gains Tax in the future
4) you would be a landlord - so would need to comply with a lot of laws (see here)
5) you would be receiving rent, so would need to declare it as income for potential income tax
6) Do you own your own property where you live? Getting a 2nd motgage is harder
7) Because of 4 above, you would need a Buy To Let mortgage
8) BTL mortgages often prohibit letting to family
9) BTL mortgages are more expensive
10) letting to family is anyway unwise. eg if brother has money problems, fails to pay the rent, can you afford to still pay your mortgage or would you evict your brother?

10 is enough for now!

jamesd

It is not correct that you would need a BTL loan. You could increase your own loan on your own property if the LTV allows that. This is likely to be the best option. Alternatively there are lenders like NatWest that will lend on a second property where a family member is to live in it, without requiring a BTL mortgage. NatWest prohibits use of an assured shorthold tenancy for such lettings.

If you were to take out a mortgage secured on the new property you would need to be the owner because the mortgage lender would require the security of those named on the mortgage application being the owners.

The sort of amount that you're considering can be raised by me using 0% credit card purchase and balance transfer deals. Maybe by you also. Even if you can't raise it all, these could be a way to reduce the cost short term, provided you can refinance them in the future. If he has a suitably high income and ability to repay this might be a viable funding method for at least part of it, if he could reduce the amount owed to eliminate the card portion of the debt.

He may have loans available at low cost that could fund much of this, using the capital or income. A student loan is likely to be cheaper than any mortgage you can get now. You should press for this method because it leaves as much as possible of the risk with him, not you, and allows the earliest possible transfer of ownership to him, simplifying your life.

If you do not take out a mortgage secured on the property you're at liberty to enter into a loan agreement with the brother and give the house to him. Or you could use a secured loan agreement with him, using the house as security for the loan - this is likely to be a good option if you do not want to become a BTL landlord. Your income would be taxable, so factor that into the interest rate that you charge.

If you did it as a BTL landlord instead, the cost of the mortgage interest could be deducted from income before tax, so reducing your tax burden. Note again that this does not have to involve a BTL mortgage secured on the let property, just a mortgage or increase d mortgage taken out to buy it, if any mortgage is even needed.

Your tax situation is simplest if you use no mortgage secured on the new property, one on your own is OK, and give the property to him immediately when you purchase it, using a loan secured by the property. Structure it so that he has to take out maximum possible student loans to clear the debt as rapidly as he's able so that you have to tell HMRC about untaxed income for the fewest number of years. This avoids making you a BTL landlord and hence avoids that requirement to file a tax return every year and all of the other complications and hassles of being a landlord. Instead you'd just tell HMRC about the untaxed loan income so they can charge you the tax on it. You can charge him an interest rate sufficient to cover your actual after tax cost for all of this. You might instead use gradually increasing interest rates up to some cap to give an incentive for early repayment. Say starting out at cost price then increasing by 0.5% a year to your actual after tax cost plus 2.5% (before tax). Have him sign an option agreement with you that permits you to purchase the house at a set value - the initial purchase price less any capital payments, or the current market value less any capital repayments, if lower - at any point during the next five years if any of the loan is in arrears for more than six months.

Say you increased your own mortgage at 3% and you're a higher rate tax payer. This would mean these interest rates for him:

Year 1: 3 / 0.6 = 5%. The 0.6 is the tax adjustment for you.
Year 2: 3.5 / 0.6 = 5.8%
Year 3: 4 / 0.6 = 6.7%
Year 4: 4.5 / 0.6 = 7.5%
Year 5 onwards: 5% / 0.6 = 8.3%

Divide by 0.8 instead of 0.6 if you're a basic rate tax payer.

If you're able to do part of it at say 0% on a purchase credit card and are confident that he can use student loans to repay that part you could charge him 0% for the first year on that part. If you use balance transfers you could charge the balance transfer fee (adjust for tax) and then 0% for the duration of the deal, rising to the actual card interest rate if you can't get another deal.

You'd also need to link rates to Bank Rate if you used a variable rate mortgage.

As a student it's likely that he will want to move when he graduates. The plan does not seem like a sound one for this reason, unless you want to be a BTL landlord with him as a tenant and being charged just your costs, then you having another tenant when he moves on.

Note that if he ends up on benefits it is normal for a family landlord to disqualify the person from help with housing costs.

G_M

James makes some good points and suggestions.

Not sure how

NatWest prohibits use of an assured shorthold tenancy for such lettings.

works. An AST arises automatically if the conditions are met. You can't just agree/state that it is not an AST. Rent is key. If the 'tenant'/'occupier' paid the 'landlord'/'owner's mortgage, that would be rent, and an AST would arise. (Rent does not have to be a cash payment to the LL - it can be any payment in kind (eg weekly eggs from the hens in the garden!) and it can be to other parties to pay off a landlords debts eg mortgage).

If NO payment of ANY kind were made, then the occupant would indeed be a 'permitted occupier' rather than an (AST) tenant.

But I am not an expert in mortgages generally or NatWest in particular, so happy to be corrected.

jamesd

That's a NatWest requirement, I assume intended to block BTL use with their residential mortgage product.

Students quite often have places to live under license rather than AST and that might be viable for this situation, say if services such as cleaning were to be provided and if it was made amply clear in other ways that there was no exclusive right to use until the end of the agreements.

Annisele

I'm wondering whether the brother would be contributing anything to the purchase price. OP says that the property "would need a small mortgage", but he doesn't say who would be stumping up the deposit. Whoever it is there are possible implications.

BigAunty

Is he paying you rent?

If he needs to apply for housing benefit in the future, you have to be aware that he will only get the shared property rate, rather than a 1 bedroom self contained property rate, if he is under 35. Check the Direct Gov website for the Local Housing Allowance for a shared property in the local area - you may be shocked how low it is.

Also, when a landlord is closely related to the tenant, the council take closer scrutiny of the LHA application to check if it is a contrived tenancy, one set up to take advantage of the HB system. Google 'contrived tenancy' to understand what they look for. Any kind of informality in the letting, not doing it on a proper and commercial basis, can make it risky as to whether he will qualify for LHA.

Same benefit problems could arise for you if you simply gift him the property by putting him on the deeds up front. If you need to apply for means tested benefits, this capital could be included by the DWP or HMRC if they believe that you have deliberately deprived yourself of your capital to put yourself in a better position to qualify for benefits and you will be treated as if you still have the money even though you can't access it (known as notional capital). Google 'deprivation of capital'.

It's only supposed to be for those who have intentionally done this but you've got to see why these rules are in place otherwise benefit claimants would simply transfer their capital to others in order to be entitled to benefits.