Buying half a house vs gifted deposit

bigoll

I'm not sure if anyone will be able to help but thought I'd ask anyway. My girlfriend and I are looking to buy her grandmother's house which, for argument's sake, is valued at £700k. As we have deposit cash of around £50k and a maximum reasonable mortgage lending total of £300k, we could never afford that outright, so there are two options open to us:

1. We take out a £300k mortgage, combine with our £50k deposit and buy half of the house. The other half will be inherited by my girlfriend on her grandmother's death. Advantages include reducing the stamp duty burden by two-thirds (possibly - getting legal advice on this); disadvantages include potentially complicated legal arrangements around multiple ownership; and worse choices in the mortgage market given the LTV figure involved.

2. We take out a £300k mortgage, combine with our £50k cash AND her grandmother gifts us the other half of the house as a further £350k towards the deposit. Advantages include owning the property outright straight away and access to much better mortgage deals with smaller LTV figures. Disadvantages include a massive stamp duty bill.

While we are receiving legal advice on the two options, my question to you would be what would a mortgage provider require in terms of documentation to support a mortgage application under either option? Obviously there are the usual requirements such as proof of income etc, but I need to know if a mortgage provider would need specific documents to support a 50% purchase or a large gifted deposit.

I will ultimately direct this question towards the mortgage lenders, but I won't know which ones to approach until one of the two options is chosen, thus settling the LTV and other questions first. So I thought the forum might have some thoughts first!

kingstreet

You can't borrow on half a house. The mortgage would be on the whole property and in all three names - and therefore unlikely to be available to the grandmother.

The second option requires a purchase at undervalue from a family member. Downside to this is that lenders will usually not accept the "donor" continuing to live there.

bigoll

Thanks for the quick response, kingstreet; I understand what you're saying about buying half a house and I feared option 1 would have to involve the grandmother. The thing is, the house is mortgage free and we'd only be borrowing on the basis of what my girlfriend and I could afford, so the grandmother's financial clout or ability to pay wouldn't come into it. As she has effectively bought and paid for the house already, there's nothing to remortgage.

Is a purchase at under value the same as a gifted deposit? I don't see the difference: grandmother gives us £350k cash for a deposit vs grandmother gives us half a £700k house for free. It's worth noting that the grandmother has not lived in the house for a decade - she lives in a retirement home, hence offering to 'give' us the house.

kingstreet

bigoll wrote: »

Thanks for the quick response, kingstreet; I understand what you're saying about buying half a house and I feared option 1 would have to involve the grandmother. The thing is, the house is mortgage free and we'd only be borrowing on the basis of what my girlfriend and I could afford, so the grandmother's financial clout or ability to pay wouldn't come into it. As she has effectively bought and paid for the house already, there's nothing to remortgage

As the owner of the property, she has to be party to the mortgage. A lender would be unable to exercise its right of repossession if it permitted more people to the title than there are subject to the mortgage.

Is a purchase at under value the same as a gifted deposit? I don't see the difference: grandmother gives us £350k cash for a deposit vs grandmother gives us half a £700k house for free. It's worth noting that the grandmother has not lived in the house for a decade - she lives in a retirement home, hence offering to 'give' us the house.

Gifted deposit is usually confined to a cash gift from one person to another. When you are being gifted equity in an undervalue transaction, the term is as I mentioned earlier. TBH it's no big deal, either way.

Her residence elsewhere will help as she won't need to continue to live there.

bigoll

Thanks again, Kingstreet. A couple more questions, if I may:

So, in the case of option 1, the three of us would have to be parties to the mortgage. The interesting thing here is that one of the parties would also be the vendor! I assume option 1 would therefore have to involve a remortgage of the property, with the three of us taking out a mortgage for £300k but my girlfriend and I effectively servicing that, as the loan amount would go into grandmother's bank account as vendor. Would a mortgage lender expect the grandmother to also be able to contribute to repayments, or would they effectively ignore her presence on the mortgage as a merely administrative party?

Under option 2, and given the grandmother doesn't live there, would purchasing at undervalue restrict our access to mortgages, or complicate the buying/mortgage process any more than usual? I guess it comes back to my original question - what would a mortgage provider need in the form of documentation to proceed with a mortgage on a property purchased at undervalue?

And finally, would stamp duty be payable on the valuation price of the property (we're having it valued by a surveyor), say £700k, or on the price we ultimately pay for it, i.e. £350k?

GMS

For 'option 1' she wouldn't be the vendor as she would be refinancing, not selling. The fact that the proceeds of the remortgage are going to her does not make her a vendor. Lender wouldn't care who paid the mortgage but the age of the grandmother would likely restrct the term which may make it unaffordable.

Option 2 would be something to discuss with a lender. You would need to ensure that the amount of gift is acceptable. Letter stating gift of equity and no interest in the property would be required, and it would be wise to get Independent Legal Advice for the grandmother.

As she is in residential care have you looked at the implications of selling assets?

kingstreet

Option 1 is the remortgage of an unencumbered property. In the process of remortgaging, a transfer of equity is also carried out to have the two new parties included in the title to the property.

Stamp duty is also likely to be payable in such circumstances.

http://www.hmrc.gov.uk/sdlt/calculate/transfer-ownership.htm

How a lender might approach this, I don't know. Many set a maximum age for a mortgage at 75.

Option 2, purchase at undervalue, may not be accepted by some lenders. The documentation you would need will be the same as it is for any other mortgage. The solicitor handling the purchase may have a bit of extra work on the lender's behalf though.

The stamp duty implications on a purchase at undervalue should be checked with your solicitor or HMRC.

bigoll

GMS, thanks for your advice. What would determine whether a lender would find the amount of the gift 'acceptable', in your mind? I'd have thought they'd be happy with the fact they're lending me £300k, rather than any quibble about the value of the property it's secured against (i.e. double - a default would see them repossess a more valuable asset).

On the care front, she's in a private care home funded by her significant savings. Part of the reason for us buying her house is that those savings are running down so she needs to free up some capital within the next year or two to keep paying the care home fees. Presuambly the sale of assets wouldn't have any impact.

bigoll

Kingstreet, thankyou once again. As she will be 100 in a couple of months, I suspect mortgage providers would be reluctant to have her as a party! But it would be for the provider to give their specific views on this, given it would only ever by my girlfriend and I servicing the mortgage.

I suspect the same goes for purchasing at undervalue - I'll have to see what some mortgage providers have to say. What I'm now clearer on is how feasible the two options are, which will help us choose to a route to follow and thus which mortgage providers to approach.

We're getting legal advice from the grandmother's lawyers, so she'll be well represented in any discussions and hopefully we can find a plan that works.

kingstreet

I'd talk to a good independent or whole market broker about this. You could end up with half a dozen speculative credit searches on your file from talking to lenders.

Try https://www.unbiased.co.uk, switching off the "sponsored ads only" option, so you get a full list for your area.

getmore4less

If you buy it for £350k thats the SDLT

Whats she going to do with £350k at 100.

If she has other assets and enough to pay the IHT bill and expences why not just gift the lot and save the SDLT completely