Private mortgage?

Legacy_user

My Dad mentioned giving me a mortgage. Is there a word for that?

Can you bods see if my sums work.

Purchase price £170,000, he buys it outright for cash.

I pay him £700 a month for 8 years.

After 8 years, I buy it back for £150,000.

I think this means my Dad makes a £47,200 profit over 8 years. Is this a good return?

Benefit for me is I get to keep my £24k deposit I;ve saved so far to start a family with and have cheaper repayments.

What have I missed? Be nice These numbers are fairly random, I just took an initial guess.

Generali

I guess the big risks are that you either default on one or more of the £700 payments or that you can't come up with the £150,000 at the end.

Also, what happens if one of you die during the 8 years? Your Dad owns the property that your family are hoping to live in. It will pass to his estate on his death and on yours he may have a change of heart.

Don't forget that SDLT (stamp duty) is payable on the market value of the house on exchange of beneficial ownership. That will include after 8 years when your Dad sells you the house. In addition, if your Dad sells you the house for £150,000 and dies within 7 years of the sale and the house is worth more at that time there could be an inheritance tax liability.

The short version of all that is get a proper solicitor to draw up contracts properly if you want to do this.

purch

Joeskeppi wrote: »

What have I missed?

The Tax implications ?

purch

I think this means my Dad makes a £47,200 profit over 8 years. Is this a good return?

Depends on where he currently has thus money invested, and where he could alternatively invest it.

In short, No.

RenovationMan

Inheritance tax threshold is £325,000 so a £170k house would be fine as long as other monies/estates were not inherited.

The house could be sold and the father can put a charge on the house with the land registry to show that he has an interest in it (the house cannot be sold without dad's consent). Wills can be written to cover inheritance and the purchase price can be paid back to Dad on a monthly basis.

If the house is a second home, then Dad will have to pay capital gains on the same of the property.

I agree with Generali's assessment about the solicitor. I know this can be done because my folks sold a house this way to someone in the 70s who couldn't get a mortgage. Bit risky, but the person they sold it to was solid as a rock and didn't miss a single payment.

paddyrg

Joeskeppi wrote: »

I think this means my Dad makes a £47,200 profit over 8 years. Is this a good return?

I'll bet that figure comes from compounding at 5% over 8 years. As the market is, that's pretty fair, but if he's offering that as a fixed-rate he's probably stitching himself up a bit as rates will rise most likely within the next 2 general elections...

HOWEVER whilst this is a partly financial arrangement, it is also family, and your dad trying to help you out - so I don't think if he got back say £53k profit it would make as big a difference to his life as knowing his genes are being well protected.

JonnyBravo

Generali wrote: »

Also, what happens if one of you die during the 8 years? Your Dad owns the property that your family are hoping to live in. It will pass to his estate on his death and on yours he may have a change of heart.

Absolutely gen.
Of course it could be done differently Joe, ie your dad will give you the money, ie the mortgage, and you will purchase it and own it.
Of course as RM says your dad may want a charge on the property.

This all depends on how "legally watertight" you want it. I have no idea of how complex this is to arrange.

Of course it can be done if trust is 100%.
I used to have a "mortgage" with my dad for 4ish years. He lent me some money. I paid him a rate higher than he was getting on deposit and I got a rate slightly lower than the mortgage I would have had at the time.
This was done entirely on trust and with the agreement that if anything happened to me my wife would continue to pay. (Of course it is entirely possible my dad may have not collected then but that would have been his decision and risk)
All done on "word" only. No charge on the property etc. I have no idea what his accountant declared for tax.
It all depends on how much you trust your dad to not need the money early (or what you'll do if he does) and how much he trusts you to pay no matter what (or what you've agreed to do if you can't pay).
As it is I repaid early just before my 40th b'day!

As for is it a good return? Well, I'm with paddy. It depends on what his goal is IMO.

System

Cheers guys, plenty to think about. Nothing looks too scary that a solicitor couldn't solve. I think it could be an option.

paddyrg wrote: »

I'll bet that figure comes from compounding at 5% over 8 years. As the market is, that's pretty fair, but if he's offering that as a fixed-rate he's probably stitching himself up a bit as rates will rise most likely within the next 2 general elections...

HOWEVER whilst this is a partly financial arrangement, it is also family, and your dad trying to help you out - so I don't think if he got back say £53k profit it would make as big a difference to his life as knowing his genes are being well protected.

I got that figure £700 x 12months x 8 years = £67200, minus the 20k "capital" I pay off.

I just guessed at these numbers, the only one that's pretty solid is the 8 years, he wants to retire in 8.5. I could pay say £750, I don't want him to be worse off from doing it really, ideally we would both benefit.

RenovationMan

JB's description of his mutually benefitial arrangement (a rate higher than his Dad would get on deposit and lower than JB would pay on a mortgage) sounds ideal. A bit of work to track savings rates to make sure your Dad doesn't miss out, but nothing too arduous.

A nice thing for your folks to do for you, that actually benefits everyone. Good luck with it.

MacMickster

Also consider that IF property prices should fall over the next 8 years, or lending criteria get stricter, then you may have trouble raising the funds to buy it from your Dad. You should definitely discuss what would happen in a wide range of (albeit unlikely) scenarios to be sure that you are both happy with those risks.

chewmylegoff

Personally, if I was doing this, I wouldn't structure it so that your dad receives taxable rental income or a taxable capital gain.