Helping the parents

Lyz_Fox

Hey guys,

another financial question so I am lost before I start.

My parents are coming towards the end of their endowment mortgage and they dont have enough money in the pot to pay off the mortgage & they are both heading towards retirement age.

If the house is worth aprox 150k and we were to buy it off them for the amount that is outstanding (70k) and they remained in it just paying us the amount that will be for the mortgage payment would we have to take out a buy to let mortgage or would it be a first time buyer mortgage? (we currently rent and will not be having to buy a house anytime in the next 20 years)

I hope this makes sense and if anyone has any better suggestions please feel free?

Thanks

GMS

Be careful of the 'sale and rent back' element of the transaction.

You may well find lenders not happy for your parents to remain having sold the property to you at undervalue.

Ensure you go into full detail with any prospective lender.

ViolaLass

You need to google 'deprivation of capital' too.

Lyz_Fox

thank you for the responses, would the deprivation of capital just be in relation to benefits and care homes? they are both fit and healthy for the moment (if they went into a care home in years time we would be int he financial position to pay for this privately, would that make any difference? and I believe that they dont claim any benefits or is this something to do with the mortgage?
with regards to the lenders, why would they be unhappy, I take it then that they would not just be happy to get their money each month?
sorry for the questions but anything financial is beyond me.
any suggestions on how we could approach this then as we cant take out a £150k mortgage just to give them the equity at this moment in time but we could get enough so that they wouldn't lose the house as we would be able to pay off the 70k outstanding but obviously the deeds would then have to be sold into our names?

GMS

From a lender point of view a sale should involve the sellers leaving the property. If the sellers remain in the property then there is a potential for an overriding interest meaning the lender could have issues should they need to repossess.

More often than not they would want the parents to reside elsewhere.

Speak to lender(s) and get their opinion. Ensure they are aware that the reansaction will be a sale at undervalue with the gifted equity being from parents who will continue to reside.

Lyz_Fox

thank you for the advice much appreciated, one final question, any banks etc who you happen to know will look at this more favourably? and how do the equity release people go about doing it or is it because they lend not a mortgage? (sorry that was 2 questions )

ceeforcat

Think about this:

1) Your parents will have disposed of an asset worth £150000 but, because they continue to live in the house, HMRC will deem the transfer not to have taken place and the full value will be included in their estate (gift with reservation of benefit)

2) you will have acquired an asset for £70000. When you go to sell it, whenever, you will pay Capital Gains tax on the profit over and above £70000 with no private residence relief because it was never your main residence. Already we have a profit of £80000.

You will have turned a tax free asset, a main residence, into one which potentially will be liable to two taxes.

Is there no possibility of one of the lifetime mortgages (Halifax?) being taken out by your parents with you as guarantor and paying the mortgage? (This last paragraph is not within my area of expertise and, if inappropriate, comes under the heading of misinformed suggestion)

Lyz_Fox

ah yes, that doesn't look good, i hadn't thought about that way (purely looking inside the box on this)

ceeforcat

http://www.equityreleasesupermarket.co.uk/the-halifax-retirement-home-plan.html

I only know about this because my parents have one.

EDIT TO SAY THAT I DID NOT NOTICE THAT IT HAD BEEN WITHDRAWN FROM 17TH AUGUST. - SOD'S LAW. SORRY!

holly_hobby

Hi there,

1. GWR comment as above is valid and will cause an issue if their net estate (inc the property) will exceed 650K on 2nd death (this is using the nil rate band IHT spousal transfer arrangement), or 325k if going the singular route/no transferral of nil rate band.

2. Deprevation of assets - is relevant if your parents were to seek state funded long term care funding assistance.

3. CGT exposure (net of your unused annual cgt allowance) on any gain realised on disposal of the property

4. Lenders have a real issue with situations such as this i.e where a property is sold but the vendors remain resident post completion - this is due to possible issues re the application of any future possession order.

5. Halifax lifetime mge is closed to new business.

6. Other equity release lifetime mge providers have a min age of 55 where the equity released is relative to the property value and age of the applicants - at 70/150 and both relatively young - the figs won't stack up (unless you can add a chunk of cash to help redeem the os 70k and facilitate the move ?). The interest is rolled up onto the debt, which can erode any free equity (ensure no neg equity gte), although there is a provider whom does permit monthly repayment of interest to assist in effectively ringfencing the debt and free equity (notwithstanding market movements of course !).

Depending upon how much the shortfall is, I would advise for your parents to speak to the lender put them in the picture NOW, and see what assistance they can give - ie coverting the shortfall to C&I and extending the term (relevant to their post retirement income of course).

The bottom line reality of course is that they may well have to sell the property and down scale, maybe into renting, or shared ownership (which will require a downpayment of course, but will give them some security of tenure) - but they must start planning and taking steps now to manage the situation.

Hope this helps .. wish you well

Holly x

Lyz_Fox

Thanky you all for your replies and taking the time to explain things to me but thanks especially to Holly as that is of great help.
cheers