Majority Percentage Deposit - How Does this Affect the Mortgage?

kategg

Hi everyone,

I am very very lucky to have been given an opportunity by a family friend to get on the ladder in London. He has offered to invest a large chunk of money in property with me. He will put up about 70% of the price of a property which will pay as a downpayment. I would take a mortgage out for the remaining 30% which would be in my name only. That way the repayments would be affordable for me. I would live in the place.

So he wants this to move quite quickly. Most people get years to save and research mortgages and I am having to get to grips with a lot of knowledge very quickly as I knew nothing about it before! I went to see the bank today (Nationwide) and they said the only way they would give me a mortgage would be if family friend signed something saying that the 70% money was a gift and did not have to be repaid. They said this was because if I couldn't pay the mortgage repayments for whatever reason and they repossessed the house and sold it then they would maybe sell it for less than the original 70% value and therefore couldn't be held to that original investment.

I have totally confused myself on this. I thought I got where they were coming from when they told me. But now I am thinking - the 70% payment would already have been paid. So surely we would already own 70% of the house? The mortgage was only ever for 30% of the house. So why would they have the right to take the whole house?

Very very very confused. Any help or guidance would be appreciated. I've probably just misunderstood the whole thing!

Thrugelmir

As long as the property has a mortgage on it. The lender owns it. Property falls in value as well as rises. If you were to default on the mortgage then interest arrears would accrue.

Any arrangement between you and the family friend would have to be a private arrangement as would have no legal standing.

What's the planned exit route? As I assume the gift is only going to be temporary.

kingstreet

A sole mortgage on a jointly owned property is not going to be possible. Lenders may also have a problem with a deposit being paid by someone not resident in the property who may not be party to the mortgage.

Finally, some lenders won't be happy the "investor" has an interest in the property in return for his investment.

kategg

WEll it's not really a gift - it's just the money isn't making anything in savings accounts so he sees the house as a more worthwhile investment. When we sell in the future he will probably make more on his investment than if he had kept it in the bank.

We had planned to draw up an agreement with a solicitor outlining the who owns whats and what happens if someone wants to sell and someone else doesn't etc etc. I understand that that would be a side thing that would have nothing to do with the mortgage and lender.

But it just seems incredible to me that if you pay off 70% of a property upfront you could still lose 100% of it if you fail to pay on the 30%. Madness! Is that really the way it is?

Surely this happens all the time with people's parents covering costs? The trouble with a joint mortgage would be that he is 58 (i'm only 26) and so the maximum length of mortgage would only be 17 years, probably pushing the payments higher than I can afford.

Know what you all do - what do you think is the best way to go about this?

kingstreet

In the event of repossession, the lender is legally obliged to obtain the best possible price for the property and once its debt and costs have been deducted from the sale proceeds, it passes on any residue to the borrower.

akamustang

kategg wrote: »

But it just seems incredible to me that if you pay off 70% of a property upfront you could still lose 100% of it if you fail to pay on the 30%. Madness! Is that really the way it is?

You wouldn't necessarily lose 100%, it works the way kingstreet described. I will show an example with numbers.

Say the property was bought for 500k, with a 70% deposit (350k) and a 30% mortgage (150k). Now in 15 years time lets pretend you have repaid 70k of the 150k, but the lender is only able to sell for 525k.

They will take their remaining 80k owed and return to you the rest, 445k. Now it's upto you and your friend how you wish to split this, if you take back your 70k that leaves your friend with 375k, which is only around a 0.5% return on investment per year.

Hopefully the lender would be able to achieve more than 525k though.