Mortgage on half the value of a property! VERY confusing so please read on!

beckz900

I'll try and explain this as simply as I can so please bear with me...

My partner's Grandma unfortunately passed away in December and she has left behind a 3 bedroom house which she owned outright. The house has been left to her 3 children, one of which is my partner's mother, and so between them they each own a third of the house.

My partner has been looking to buy a property recently, but being a first-time buyer and being the only person on the mortgage, he could only afford to look at flats on the east side of London. He now has the opportunity to buy his Grandma's old house and this is where it gets confusing.

My partner's salary is approximately £22000 and with a deposit of up to £45,000 he was only able to look at properties up to the value of around £140,000. His mother and her siblings have agreed they would sell the house to him for £215,000 with the aim that I myself would have a half of the house with him. As I am currently finishing my Masters degree (I went back to university to do this) and therefore have left work for the time being, it means I am not in a situation at the moment to take out a joint mortgage with him. So...

His mother has offered to put in the other half of the money, so my partner would need a mortgage for half of the property value (£107,500) and his mother would put in the other half as cash. The idea of this would be to buy me a couple of years (when I will have been earning again for nearly two years) so I would then be in a position to buy her out of the house, meaning she will get her £107,500 back, and myself and my partner would own half the property each (or jointly, however you want to put it).

The other plus side to this is that my partner gets a much larger property which will suit us for a much longer period of time (3 bedroom house with a garden in a really nice area, as opposed to a 1 bedroom flat in a not so desirable area) and it also means he wouldn't need to use all of his £45,000 savings towards a deposit on the mortgage, he would only need to use around £25,000 leaving him £20,000 to spend on modernising the house.

The confusion in all of this is what is the best way for them to go about doing this. Ideally the house would just be in my partner's name, but then how does he get a mortgage for only half the value, because if there is no mention of his mother's money in the property, then it will cause problems in me buying her out two or three years down the line.

A solicitor has mentioned her having a second charge on the house, but as I understand it from other advisers this would cause problems for my partner getting a mortgage for his half of the property, etc. We are just completely confused.

Someone else suggested that he and his mother get a joint mortgage, using her £107,500 and my partner's £25,000 as the deposit and then my partner would make the monthly payments for the loaned amount, but again, how would this work in two to three years time when I want to buy her out, so she gets her £107,500 and me and my partner get a joint mortgage or whatever?

Sorry this is such a long post, it's the only way I could explain, but if ANYONE has any information, advice, suggestions on who to speak to, etc, it would be VERY much appreciated.

Thanks

DVardysShadow

Effectively, partner needs to buy 2/3 of the property from mother's siblings and needs to put together £144,000 to do so. This can be raised from savings and from a mortgage in partner and mother's names. The should hold the property as Tenants in Common, with shares of 1/3 and 2/3.

When it comes to time to buy out mother, at current prices, you need another £72000, assuming prices do not shift. At this point, it becomes difficult, because the equity could be just 10%.

You need to make more equity available by putting some more savings of your own in or by improving the house to the point that the equity has demonstrably improved.

ViolaLass

beckz900 wrote: »

but then how does he get a mortgage for only half the value, because if there is no mention of his mother's money in the property, then it will cause problems in me buying her out two or three years down the line.

Why will it cause problems? You get a mortgage and give her the money. Or he gets a joint mortgage for now and later gets a joint one with you instead.

holly_hobby

Little confused here ...

Mum & 2 siblings own grannys house ?

Son is to pch 50% of prop value with a mge of £107,500, and Mum is putting in £107,500 to complete the pch .... thats where I am confused .... is that £107,500 from Mum in excess of her own equittable share ?

Or what does the £215k we are discussing actually represent re the overall value of the property ?

Now I've had a lovely large'ish glass of pignot so I may have got this about face .... hic !

Holly x

getmore4less

The issue you have here is you are going to have a problem with the mothers equity/cash being a loan rather than a full gifted deposit.

Saying it a gift when it is really a loan is lieing.

You also have to be carefull about the timing of any loan and who has what equity.

Safest is you hve 50:50 equity at the start and you effectifly have a cash debt.

This seperates the debt from equity and makes it easier to do the calculations and not dependant of house value.

The mothers loan is reapid at some point and the two of you carry all the equity risk.

problem is it is very dependant of you getting a job and being able to raise extra capital in the future which may not happen.


If the OH and mother buy together then that leaves the issue of change of ownership(to you) later and new valuations, what happens if the value drops and mum can't get her money back, or it goes sup and there is a CGT implication.


if renovations are planned that will complicate the situation even more especialy if the funds all come from the OH.


From a funding equity point of view on paper if you want to end up 50:50 it is easier to structure this as equity/debt

You both own 50:50 and you accumulate debt 1/2 the purchase and 1/2 the cost of renovations.

Now the big risk here is you do a runner so this is secured by second charges on the property to the value of your debt to the OH/Mother but does leave the mother with the risk she can't get the money back untill the house is sold and as second charge ther may not be enough left after the motgage is repaid.


As I see this bottom line is if the OH(you) can't raise the funds either the mother needs to continue to own some of the property or gift some/all the equity/cash to make up the difference.


Another angle is private mortgage, do the siblings need the money imediately.

they sell the house to both of you for the agreed amount and you owe them the money and you come up with an agreement to repay the debts, initialy slowly and later much faster when you are bothe working

Best if this is interest free to avoid income tax issues.

holly_hobby

Number of issues that I see ..... notwithstanding the figs and mum injecting capital when she is a equittible holder, needing further clarification.

But... essentialluy Mum gifts £107k to Son in order to complete the purchase and all transfers of equity (ie - her own, and 2 sisters) for an apparent sum of £215k...

BUT .... Mum wants her 107k back, and wants gtes that she will get it back ....

So we now have a source of deposit, not by discounted or family purchase, but as a gift with reservation. This is a no no from the lenders point of view - of course I say this playing things down the line. i.e if the lender asks for the source of the 107k deposit, Son must disclose it is a loan (not a gift) from his mother.

Put that to one side, mum wants legal recognition of her status as "investor" - well she'll be off the deeds (having sold to son), as if she remains on the deeds (to protect her interest) she also has to be party to the mortgage.

So the subject of 2nd charges rear their head instead .... problem is the lender as 1st chargee, is not duty bound to give permission to any further registration of charges, (even where there are copious amounts of free equity), in that event what will Mum do to secure her interest (trust deed possibly ?).

If the lender does give permission to 2nd charge registration, their legal dept will see the applicant chargee is actually Mum, for a sum equal to the deposit her Son (the mortgagor) said was a gift without reservation ..... that will raise an eyebrow or 2 ! So you can see why a 2nd charge is also not really a valid option (in my opinion) - either the lender refuses outright, or they say yes, and then you show your hand by the details of the charge reqd, to which you have now essentially provided evidence of a fraudulent mge application, and all the ramifications that can come with it.

So, instead Mum stays on deeds, and becomes jnt mortgagor with Son. This would be a unencumbered remortgage appliction (with 3 transfers of equity (TOE) i.e 2 sisters off, and 1 Son on).

Its confusingly classed as a remortgage (even though its unencumbered/mge free at the time of application) as Mum already holds property title, ie she is mortgaging a property already owned by her. NB - Due to the TOE elements the application will not qualify for any "fee free" remortgage legals that you will see lenders offer.

Issues are, property is not Mums primary residence, so her income would need to be sufficient to svc both the mge on grannys house and her own.

She will be exposed to CGT and a possible bill (subject to any gain on disposal i.e when you effectively take over her share, and permitted allowances/reliefs at the time).

If Mum goes on Mge to avoid 2nd charge issues - a joint mge may be recommended, due to automatic transfer of death to surviving party.

However, that brings me to the fact, what happens if Son dies before transfer between you and Mum, would he want you to benefit or the property remain within his immediate family.

If he wants you to benefit, than a tenants in common arrangement should be effected (which does not have to be unequal shares, although this is what a TIC arrangement is usually associated with. It may be on equal 50% shares) - the difference being on a TIC arrangement, that there is no automatic tsf to surviving owner, and that the individual may bequeath their share of the property to anyone they choose.

Private mge arrangement as suggested may be a solution - the owners need to decide if they want interest charging (which as stated is subject to income tax at their highest rate). They may also register a charge with LR.

Don't forget Son will be liable to SDLT onthe purchase too

You need to all sit down with your Solicitor, FA and accountant to thrash out the details on this

Hope this helps

Holly

beckz900

DVardysShadow wrote: »

Effectively, partner needs to buy 2/3 of the property from mother's siblings and needs to put together £144,000 to do so. This can be raised from savings and from a mortgage in partner and mother's names. The should hold the property as Tenants in Common, with shares of 1/3 and 2/3.

When it comes to time to buy out mother, at current prices, you need another £72000, assuming prices do not shift. At this point, it becomes difficult, because the equity could be just 10%.

You need to make more equity available by putting some more savings of your own in or by improving the house to the point that the equity has demonstrably improved.

Sorry, I may not have explained very well, my partner would only hold a 1/2 share in the house, as his Mother would add the extra cash to her current stake of a 1/3 to make it up to the £107,500.

Also, something I forgot to mention, the house is worth closer to £250,000 but they have agreed to sell it for £215,000 as they are keen on the house staying within the family and would be happy with the amount they would each receive at this selling price. Does this make a difference?

Thank you for your response, it is much appreciated

beckz900

holly_hobby wrote: »

Little confused here ...

Mum & 2 siblings own grannys house ?

Son is to pch 50% of prop value with a mge of £107,500, and Mum is putting in £107,500 to complete the pch .... thats where I am confused .... is that £107,500 from Mum in excess of her own equittable share ?

Or what does the £215k we are discussing actually represent re the overall value of the property ?

Now I've had a lovely large'ish glass of pignot so I may have got this about face .... hic !

Holly x

Hi Holly,

Thanks for your reply. Sorry, I didn't explain very well, my partner would hold a 1/2 share in the house and his Mother would add the extra cash to her current stake of a 1/3 to make it up to the £107,500, not on top of her current stake.

Also, the house is worth closer to £250,000 but they have agreed to sell it for £215,000 as they are keen on the house staying within the family and would be happy with the amount they would each receive at this selling price.

I hope that explains things a bit better, I think it was my explanation not the wine that was confusing :P

getmore4less

Makes no difference to the issues.

add one though, are you buying in at the £250k or £215k value at that time.

Thrugelmir

If the plan came to fruition. When his mother sells her share of the property. What's the exit plan.
Does she expect a return on her £107,500 investment?

lowlitmemory

Masters degrees surely wouldn't last more than a year, two years if part-time. Would it not be better/easier/simpler for the house to be rented out for a year or so until you can find a job and buy the house together with your partner from his relatives? His mother can perhaps gift him her share (not sure on the legalities of this) and you and he can jointly find a mortgage for the remainder.