Getting a mortgage FOR my parents? Advice please

PCManchester2012

Hi all,

Topline: my father called me today and asked whether I would be interested in taking out a mortgage for him in return for £10k.

Now, let me explain further before you all think it's some sort of dodgy deal! My grandmother (my dad's mum) passed away about a year ago. She left her house, which had no mortgage, to my dad and his 3 siblings. Today they've received an offer on the property of £335,000. If the sale goes through my dad would receive an equal share, so around £82,000 after the associated costs.

He has decided, along with my mother, that he would like to go into property... start small with a property worth around £220k at present that needs some work and hopefully sell it for £255k and so on. He is a builder by trade (though not practised for a number of years) and so intends to do most of the structural work himself or through ex work colleagues. The problem is, after selling their current house they would likely be left with £20k profit, which would make a mortgage impossible based on a property value of circa £220k. He has some adverse credit history due to using personal lending to try and prop up his business after sales took a nose dive (down 45% in 5 years) due to the recession.

Basically he's proposing that I get a mortgage, solely in my name, in return for him giving me £10k. The intention is then that I would get a mortgage of around £120k which would allow them to purchase a property in order to sell it on.

Now, I have owned a property before but not had my name on the mortgage (it was in my ex's name) which we're selling at the moment, so I'm not sure whether I would lose the first time buyer mortgage options if I did this deal, or whether I've already lost them by having my name on the title deeds of the house I'm selling. Are first time mortgage options even worth looking at? They seem to have the same rates as regular mortgages most of the time!

The £10k would definitely help me... I have loans and credit card debit totalling £19k and so, with the £12k profit I'm getting next week from selling my house with my ex, it would totally wipe all the debt off which, I can tell you, would be a huge god send and remove a lot of worry that I go through each month.

Should I even be considering this? Is it crazy or does it make good business sense considering that I would pay off my debts and as a result be about £800 per month better off? There's nothing legally wrong as far as I can see as it's basically what I've done with my ex on this property. I would probably ask for 1% of the final selling price when they sell the place on to just cover everything and the risk I'm in (so a potential for an extra £2,500 at some point in the future). Obviously there is a lot of risk on me... if they stop paying the mortgage (through me) then it's my credit score that would be destroyed... BUT the £10k would make my life so much easier and stress free.

I am really unsure about what to do here. My parents are honest, hard working people who have lost a lot due to the recession and it would be such a weight off their shoulders to be able to move out of their current house, where the mortgage is very heavy, and possibly half their mortgage repayments on a smaller place whilst also doing it up for sale. I was concerned about my credit score as I've had a bit of adverse credit in the past myself, however according to Credit Expert from Experian my score is 873 out of 1,000... this has dramatically improved over the past 6 - 12 months as the last time I checked it was around 550 out of 1,000. As such, it shouldn't be a problem getting a mortgage as far as I can see.

About me - 25 years old. Permanently, full time employed. Basic salary of £37,220 per year - been with my employer for 13 months.

19lottie82

it may look like a good idea in principal but there are loads of things that could go wrong and plenty of nightmare scenarios.

for example...... what happened if in a few years, you were married with your own family to support, then your parents stopped being able to pay the mortgage, and you couldn't afford to pay it either? would you sell the place and see them homeless? or keep them in there as long as you could and see your credit rating trashed?

PCManchester2012

Thanks Lottie. That's my concern as well.

Basically they'd be looking to have the property ready to sell within 6 months and then it's just a waiting game to sell it. Of course property prices go up as well as down, however I'm not planning to want to purchase a property for at least 2 - 5 years as my work is taking me abroad quite a bit and my accomodation out there and at home in the UK is paid for as a result. As such, I wouldn't be looking for my own place for quite a while, or even be able to afford one as I have no deposit anyway.

kingstreet

Issues;-

- deposit paid by someone not on mortgage living in property
- development finance for renovation business
- you are no longer a FTB but this may be of limited benefit, as you say
- you won't be occupying the property, so not residential
- lenders want readily-lettable property if BTL route suggested
- BTL occupied by family is a "regulated" transaction.

There are so many issues with this plan. It needs very careful planning and piecing together. A broker is going to be needed.

The "do it up and flip it" plan is probably the biggest pitfall. Mortgage lenders don't like it. They want "investors" to buy and let quality property, not to be a project for a builder wanting to make a bit of profit on the side...

JQ.

Recipe for disaster. You have money problems, your father has money problems and the solution is for everyone to borrow more money to get them out of the mire. Sounds a terrible idea.

Property development is not about construction skills, it's about money management, time management, marketing and design.

Why not buy a £50,000 house with the inheritance and start there, why does he need to spend £220,000?

Building_Surveyor

AVOID AVOID AVOID!!! how old is your father? why such an expensive property? why not buy cheaper for cash at an auction, do it up, sell it on making several k in the process. The plan has too many pitfalls to see feasible, and sounds like you are being motivated to buy in to this plan by your dads 10k offer.

This sounds like a plan to fail, neither of you have been good with money in the past. Adding a mortgage into the equation, in your sole name is asking for trouble.

Not a good way to start property development if you ask me.

PCManchester2012

Hi all.

Appreciate all the concern you're showing - I'm thinking all the same things as well.

To answer a few questions: My father is 55 years old and in good health so not going anywhere anytime soon. He intends to get a property at auction, however in order to see double £thousand digit profit you need to be looking at higher priced properties. They have always been good with money but unfortunately, as with most small businesses, they used their house as collateral on loans to support their business so the recession has caused issues. However, despite having debts, they've never missed a credit card or mortgage payment. So they are good with money, they've just been through some difficult times.

I would almost turn it around and ask, why not an 'expensive' property? The potential upside is greater in terms of real £'s and it would allow them to start property development, which they've wanted to do for years, but also mean that I would be a lot better off financially so from that side it's win win.

Also, due to the large amount of positive equity that they would have in the property, there wouldn't be an issue in off loading it if the perverbial hit the fan. If the worst came to the worst I'd just pick up the mortgage payments for a period of time - potentially worth drawing up a contract that would give me the ability to force it be put on the market. Which, thinking about it, I would be able to do as I could get the property in my name.

Building_Surveyor

PCManchester2012 wrote: »

Hi all.

Appreciate all the concern you're showing - I'm thinking all the same things as well.

To answer a few questions: My father is 55 years old and in good health so not going anywhere anytime soon. He intends to get a property at auction, however in order to see double £thousand digit profit you need to be looking at higher priced properties. They have always been good with money but unfortunately, as with most small businesses, they used their house as collateral on loans to support their business so the recession has caused issues. However, despite having debts, they've never missed a credit card or mortgage payment. So they are good with money, they've just been through some difficult times.

I would almost turn it around and ask, why not an 'expensive' property? The potential upside is greater in terms of real £'s and it would allow them to start property development, which they've wanted to do for years, but also mean that I would be a lot better off financially so from that side it's win win.

Also, due to the large amount of positive equity that they would have in the property, there wouldn't be an issue in off loading it if the perverbial hit the fan. If the worst came to the worst I'd just pick up the mortgage payments for a period of time - potentially worth drawing up a contract that would give me the ability to force it be put on the market. Which, thinking about it, I would be able to do as I could get the property in my name.

STOP!

1) if you want to go into property development, I wouldnt advise anyone to go into it by buying an expensive property. The risk is too great. Again you are going into this motivated by the £ signs, when in reality you could make just as much money buying smaller properties to start with.

2) you will not be living in the property. Having never had a mortgage before how do you plan on getting a BTL mortgage?

if you are both hell bent on going ahead with prop development like i said, start small - you will see the benefits quicker and will give you an idea of how things work and with little risk. Why involve banks when you have the cash to start the project on a smaller scale?

Annisele

PCManchester2012 wrote: »

in order to see double £thousand digit profit you need to be looking at higher priced properties

Funding arrangements aside, your Dad is looking at buying for £220k and selling for £255k. Stamp duty thresholds make the £255k unrealistic, so say £250k. Buying and selling costs could easily be £5k (especially buying at auction; you might end up spending money on a property you don't buy), and he's giving you £10k.

So, if everything goes entirely to plan - and with the (highly unrealistic) assumption that there'll be no materials costs at all - his profit is something like £15k. Taking into account materials, and costing his time at at least minimum wage (to account for the opportunity cost of him doing this rather than something else) and I really can't see where the profit is coming from.

Taking the funding arrangements into consideration - I agree with others that you're highly unlikely to be able to persuade a lender to lend to you on this basis, which makes the whole plan a non-starter.

PCManchester2012

This wouldn't be a BTL mortgage - it would be a straight mortgage. The mortgage would be in my name, the property in joint names between my parents and myself, and that's it. The property wouldn't be let to anyone, it would be sold once complete. I wouldn't even tell the broker our plans - it's none of their business. I'd simply be after a mortgage that can be paid back quickly... I've seen some that only have early repayment charges if paid back within 1 year for example (my current house was one of these).

The £220k - £255k numbers were just an idea after a quick conversation we've had. Not necessarily true figures as the final sale price would likely be higher, though it depends on the amount of work that is done. Also, my dad owns a string of landscaping centres and so building materials can be sourced at cost price.

Kynthia

Off the top of my head:
1. Very few mortgage companies allow someone to be on the property deeds who is not on the mortgage. Therefore it is likely that you alone will own the property. What happens if it doesn't sell, ends up in negative equity, your parent's stop making mortgage payments...you will be responsible.
2. If you don't tell your mortgage company relevant information, it is mortgage fraud and actually illegal. The fact that you won't be living there is very relevant as a residential mortgage assumes this.
3. You will be responsible for any capital gains tax.
4. There is no guarantee that you will qualify for a mortgage with your debts and previous credit history. Also do you have a deposit, if not then will your parents 'gift' you the money for the deposit or will they be part owners on the mortgage too?
5. It is not easy to make money in property development. It requires being good with money, controlling budgets, organising timetables, understanding what buyers want and picking the right properties at the right price. Does your dad have these skills and do you want to put your money and future on it?

All these things need discussing with your parents in an open manner before you should decide anything.