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

beckz900

getmore4less wrote: »

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.

Hi,

Thank you so much for your response. I'll try to clarify some things that you mentioned

In terms of change in value, the house is actually worth closer to £250,000, not the £215,000 they have agreed to sell it for. Buying his mother out in a few years time, she would only want her £107,500 back, plus a little extra that would be roughly equivalent to what she didn't earn from interest by not having the money in the bank. Put simply, she really wants her son to have the house (she wants it to stay in the family as it has been in the family for 63 years) and so she offered to lend half the money for the house to buy us a bit of time until I am able to go in with my partner on it.

This is also why my partner would pay for all the renovations as the value afterwards would only be of concern to him (and me in the long run) as his Mother is purely doing this to help us buy it so she doesn't have to sell to a stranger so the effect this would have on the value wouldn't change the amount she would want from me in a few years time, she isn't interested in profiting from this.

Also, she is in no rush for her money that's in the house as her own mortgage is already paid off and she is comfortable, but her 2 siblings do need their share which is why this all can't wait a couple more years.

In terms of whether or not things work out with me and my partner, although we're almost certain they will, just to address the point, if they didn't then it wouldn't be a problem. My partner and his mother would just sell the house (like she would have had to if he hadn't wanted to buy it) and my partner would go back to looking at a smaller property for himself again (probably with more money in his back pocket too), so she has no worries about this.

I hope that addressed some of your queries. Again, thank you for your response, it is very much appreciated

beckz900

getmore4less wrote: »

Makes no difference to the issues.

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

I'll be buying in at £215k. I would buy his Mother out at the £107,500 that she invested, plus a little extra to make up for interest she won't have received from having it in the bank.

beckz900

Thrugelmir wrote: »

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?

She would only want a little extra to cover the interest she missed out on from not having it in the bank.

beckz900

lowlitmemory wrote: »

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.

Yes, my Masters lasts a year but it also includes a 6 month placement and so I can't get a mortgage until after this as I need to have a full time contract in order to obtain the mortgage. The reason we can't wait until after this is because his mother's 2 siblings would like their share sooner rather than later to help them pay off their own mortgages. Does that answer your questions? Sorry, it's such a confusing situation

holly_hobby

Ok .... deep breath ....

Property has a market value of 250K (less assume it values up ok for the purposes of the exercise)

Property is being purchase by Son for 215k , with 107.5k of this sum being loaned by his mother, leaving him with a loan requirement of 107.5k/250k (as I would presented this as a family discounted pch, so use the mkt val for mge LTV purposes).

So, we have a LTV of 43% (if 250k fig is accepted)- so far so good ...

The problem we come to is Mum (meant in the nicest way !) .... and how she wants this donation handled.

This is a Gift with Reservation, which effectively means that we are looking at Sons overall borrowing in connection with the pch as 86% LTV (and thats using the 250k mkt value) - as the deposit is neither savings, nor a true gift, but actually a private loan requiring repayment by the Donor. It also means that Mum would have grounds for a proprietary claim on the dwelling, which the lender will not want - as they want first bite of the cherry if it all goes pete tong.

If the lender uses the actual pch price of 215k, refusing family disconted purchase, we are effectively talking about 100% borrowing (albeit not all sourced from the lender) - and you are stuffed as I can not see an UW sanctioning this.

The huge issue we have with deposits coming from any kind of loan arrangment, is that the lender will take the view that in times of finanical meltdown, having little to no personal financial investment in the property (other than payments already made, and poss a reducing balance under C&I), the individual may feel less obliged (morally or financially) to maintain payments.

A gifted deposit (without reservation) is viewed differently. The lender will take the view that the mortgagor will see this cash donation as effectively their own monatary investment (which of course it is technically) - so will be loathe to lose it by walking away form the property ..... IF however it is a gift requiring repayment aka a private loan, we are back to the considered view that the mortgage may take the view "its not my monies I'm walking away from, so why bother struggling to pay the mge".

So you can see why Mum donating this as a loan (requiring interest on repayment and legal recognition) is hugely complicating matters, from a traditional mge lenders point of view. Whether or not its registered as a 2nd charge.

IF however, she were happy to rely upon Sons morals, and a gentlemans agreement that he/you will repay at a defined date, and she is of the opinion that Son wouldn't dream of swindling her out of her investment, that would be the way to go (effect a trust deed, sufficient wills and life protection) - but that would mean telling a porkie to the mge lender re the deposit being a gift without reservation ........ of which the lender will want a written disclaimer from Mum confirming no interest (ie she does not require proprietary claim in exchange for the donation). Now I am NOT for a minute suggesting you go this route, I am merely discussing what others may consider a back door option ....

OR ... she goes joint mortgagor with him .... as discussed in my earier post....

It is messy... messy .. messy ... !!

But a lovely gesture from Mum and Aunt's all the same ..

Time to sit with a broker maybe ?

Hope this helps

Holly

Dave_Ham

Holly is like a warrior with way too much knowledge and much more articulate than I..

However, if this situation walked through my door tomorrow there would be a solution it would just need to presented to the right lender.

They key to this as Holly says is trust. If Mum is happy to "gift" her share then this will be quite straightforward.

If she wants more security, she made need to go on the mortgage or formalise the security both of which bring with them hoops and hurdles to achieving a mortgage...

Definitely find yourself a decent broker and Mum will probably need a solicitor and/or accountant depending upon individual circumstances...

Good luck

holly_hobby

... I can go on a bit, I know .... sorry ... once I'm in full flow I'm off !!

Its really because, esp on complicated probs, I think its beneficial to explain why a lender doesn't like something etc, or why we are suggesting another way, so that the OP understands the issue, and if poss manage their situation to avoid the probs at hand.

I do occassionally give one liners ... honest ...

H x

holly_hobby

Dave_Ham wrote: »

If she wants more security, she made need to go on the mortgage or formalise the security both of which bring with them hoops and hurdles to achieving a mortgage...

Definitely find yourself a decent broker and Mum will probably need a solicitor and/or accountant depending upon individual circumstances...

Good luck

Agreed, I also believe the only secure route for her is to be joint mortgagor, as the details pertaining to any 2nd charge route will effectively reveal the true nature of the deposit.

If she's happy to do that, then prob solved .. if not an alternative avenue has been vaguely discussed somewhere on here ....

H