How to set a fair interest rate when borrowing money from brother.

imsi

My brother who lives in USA has agreed to lend me £40k to fund a house purchase. I have told him that I expect to pay it off within 5 years. We want to set an interest rate that is fair to both of us.
Any suggestions of a simple way to decide on the rate?

Tixy

Where is the money coming from? His savings? If so I would start from what rate he could have earned on that money if he left it in savings. Lending to you is obviously higher risk (assuming he isn't going to place a charge on your property).

Then consider what rate you could have borrowed at if you borrowed it commercially in the UK.

A fair rate would likely be somewhere between the 2 figures.

If you are going to do this and have a written agreement between you, then I would have more detail set out that you hope to pay it off within 5years. Have an agreed repayment schedule, or an agreed time that it must all be repaid by (even if that means you selling your property etc).

somethingcorporate

Is it for a deposit?

A lender won't allow you to use a loan as a deposit.

imsi

somethingcorporate wrote: »

Is it for a deposit?

.

No its more instead of a mortgage.

I have the money in ISAs but am thinking it is better to hold onto that as a last resort if I cant pay him back as planned.
Also some tax free bonds will be maturing in 18 months so I will use that money too

HappyMJ

imsi wrote: »

My brother who lives in USA has agreed to lend me £40k to fund a house purchase. I have told him that I expect to pay it off within 5 years. We want to set an interest rate that is fair to both of us.
Any suggestions of a simple way to decide on the rate?

As interest rates is USA are zero then no interest would be a good rate.

As the previous poster has mentioned a loan won't be accepted as a deposit however a gift will be. If you can get him to gift it to you then in 5 years time you choose to gift him back £40k plus whatever you wish to add on as a gift then that's up to you.

Why don't you and him buy the house together with him providing the deposit which will be secured on the house and you pay all the mortgage payments then when you want to buy him out you can make an offer at that point if you have enough equity and savings together.

BugsyBrowne

I can see this relationship with your brother ending in tears as 40k is a hell of a lot of loot to lend someone who lives in a different continent brothers or not.

HappyMJ

imsi wrote: »

No its more instead of a mortgage.

I have the money in ISAs but am thinking it is better to hold onto that as a last resort if I cant pay him back as planned.
Also some tax free bonds will be maturing in 18 months so I will use that money too

Why not just get a 5 year mortgage yourself? The cost of money isn't that high and avoids a lot of hassle.

imsi

Tixy wrote: »

Where is the money coming from? His savings? If so I would start from what rate he could have earned on that money if he left it in savings. Lending to you is obviously higher risk (assuming he isn't going to place a charge on your property).

Then consider what rate you could have borrowed at if you borrowed it commercially in the UK.

A fair rate would likely be somewhere between the 2 figures.

Yes , we'd figured it would be between those 2 points.
I'd hoped there was an easily checkable rate we could link it to.
x% above or below Bank of England rate or something

imsi

HappyMJ wrote: »

Why not just get a 5 year mortgage yourself? The cost of money isn't that high and avoids a lot of hassle.

This is a money saving site and I'm trying to save some money.
Also, isnt the low rate irrelevant? Its the difference between lending and borrowing that matters surely.

I'm assuming there are other costs besides interest to do what you suggest, too

HappyMJ

imsi wrote: »

This is a money saving site and I'm trying to save some money.
Also, isnt the low rate irrelevant? Its the difference between lending and borrowing that matters surely.

I'm assuming there are other costs besides interest to do what you suggest, too

You are taking a huge risk borowing is USD then repaying in GBP.

£40,000 GBP is currently $64,000 USD. What would happen if the exchange rate changed are you repaying $64,000 or £40,000? To put your brother back in the postion he started with I would imagine you would repay $64,000 that might cost you £50,000 in 5 years time if the exchange rate moves 25% against you....then again it might cost £30,000 if it moves 25% in your favour.

I wouldn't do it. I'd borrow in the same currency that you will be spending it in at a fixed 5 year interest rate mortgage which assuming your credit rating is very good you should be able to get at a very good rate possibly with fees included or at a low fee.

However in answer to your question I would use the bank of england base rate as the interest rate you might choose to use LIBOR which is slightly higher.

imsi

The money he is lending me is in £s not dollars. Actually an Isle of Man account he is closing down anyway.
If at any time he wants his money (exchange rates, personal circumstances) I'll pay him off early with my ISAs and move the money to wherever he wants.
It is a good point though, thanks

HappyMJ wrote: »

You are taking a huge risk borowing is USD then repaying in GBP.

£40,000 GBP is currently $64,000 USD. What would happen if the exchange rate changed are you repaying $64,000 or £40,000? To put your brother back in the postion he started with I would imagine you would repay $64,000 that might cost you £50,000 in 5 years time if the exchange rate moves 25% against you....then again it might cost £30,000 if it moves 25% in your favour.

I wouldn't do it. I'd borrow in the same currency that you will be spending it in at a fixed 5 year interest rate mortgage which assuming your credit rating is very good you should be able to get at a very good rate possibly with fees included or at a low fee.

However in answer to your question I would use the bank of england base rate as the interest rate you might choose to use LIBOR which is slightly higher.