Parent gifts money to buy house. I pay back at mortgage rate I pay to the bank.

rickbwfc

I've always thought buying a property and renting it out would give a good return on investment. Problems being maintenance etc of house and risk of dodgy tenants.

But what if my parents were the landlords and I was the tenant so to speak. Here's my thoughts.

I currently owe the bank circa 74k on my mortgage. I currently pay this back £365 at a variable rate. So annually I pay £4380.

I have 27 years left on the mortage.

If my parents could gift me the money to buy the house outright and I then paid the same mortage payment to them for the remainder of the mortgage this would give them an additional income and potentially decent return on their investment.

Is this a good idea or bad idea?

Inheritance tax shouldn't be an issue in the future as it would be under £325k per parent. I am the sole heir.

duchy

The flaw I can see is that if you couldn't pay your "rent" due to unemployment or long term illness your parents would lose out as housing benefit may not pay out as they'd be able to see that you previously owned the house and that might raise a red flag.

Also if you fell out with your parents for any reason -or if they divorced or one remarried if the other one died -it might complicate things . Also are you an only child or are there siblings if the house was considered part of a parent's estate if a financial interest can be shown ?

Is this your "forever house" or might you need to move for work or other reasons-What if you married and subsequently divorced- your spouse would have a claim .

What if your parents wanted their investment back early due to unforseen circumstances .

All might sound very far fetched at this point but an awful lot can happen in 27 years. It's something that would need discussion and legal advice to protect everyone.

rickbwfc

I agree there's a lot to consider and certainly from a legal perspective to protect everyone.

I hadn't consider the illness/redudancy factor to be fair and this is a good point. Although I have no cover in place for this at present anyway.

Falling out with my parents is inconceivable to me. Just won't happen, not concerned by this in anyway.

I am the only child everything is likely to be signed to over to me in the future.

I would probably move in the future but figured the existing house would be equity, I'd still pay parents plus any additional mortage payment.

Spouse is a consideration, I thinking pre-nupt type agreement to protect interests. Any one who loves me should understand why I would do this.

If they wanted their investment back perhaps I could remortgage?

Thank you for your views. It may be better for them to part invest in my house to a lesser value perhaps. I'm not sure. I'm interested in peoples views as I just want them to get the best value on their investment whilst they are alive, it also benefits me in the future in terms of inheritance.

What other ways could they invest 75k for a good return each month?

Thanks again for your opinions!

pjcox2005

I'd say it wasn't worth it, assuming the difference between mortgage rate and an available savings interest rate is 1% then they'd make £740 a year.

Take out costs and hassle, in ability for them to access funds and you start to question whether the benefit is worthwhile.

What happens when interest rates/mortgage rates increase, would you be happy to pay more to your parents or would you expect the interest to remain constant.

The idea just doesn't work the same as them say buying a rental property for that money where they may gain from a rental being above the capital and interest repayment (i.e. making money) or an uplift in the property value on disposal to make a gain there.

Plus you don't remove inheritance tax as if they survive 27 years then they'd have all the money back and forming part of their estate for IHT purposes.

itch_for_a_glitch

I think if your parents "give" you £75k and you own your home outright, you could then "give" them any amount you or they thought fair whenever you like.
Their tax situation might have a bearing, but (a number of) cash payments are hardly going to be seen.
Personally if I give my kids money I cant see the point of them repaying me.

rickbwfc

Good point! To be fair upon thinking into it more I had almost come to this conclusion actually. Hmmm initially it seemed a good idea but when I worked out the annual income it doesn't look as great.

Thanks

atush

They would have to pay tax on the interest they receive from you.

Another way they can invest the 75K is thru equities. They could get conservatively 4-6% income thru a series of income funds. This could be better diversification, if most of their money is in their own home and cash, as buying your house would mean 'all their eggs in one basket' in that they would hold too much in property.

I think lending it to you (even paying BRTax) would be better than leaving it in cash elsewhere.

If you got the mtg written up legally, would be the best idea.

AlwaysLearnin

Some thoughts - these are based on the assumption that your parents are not chasing the best returns i.e. there's an element that they're doing it to help you out:

You could set up an agreement between yourself and your parents (via a 'Promissory Note' perhaps), detailing the terms of the loan (it's not a gift if you're paying it back). This could include the parties involved, term of repayment, monthly payment amount/interest rate, notice period for any changes and/or request for return of funds, penalties/fees/rights if, for example, you don't pay for a month or two etc. It's always good to get these things sorted out up front - hopefully never needed, but if something goes a bit wrong then the pressure of the circumstances can escalate emotions. This agreement will also register a debt owed should your circumstances change (e.g. start a relationship), protecting your parents (and potentially you).

You could set up an offset mortgage, with the mortgage amount and an equal amount in the offset savings account. That way you still have the amount available should it ever be needed, without having to set up a new mortgage. You can then pay the mortgage payments out of the savings account, so that both balances reduce in line with each other and it just takes care of itself.

The tax on interest is something that would need considering, however perhaps your parents would agree to documenting it as an interest free loan, and you agree any additional amounts some other way (gifting?). That would involve trust, but their initial amount at least is still 'protected' that way.

Done well, it could be a hopefully safe, mutually agreeable arrangement, and you get the benefit of not having to mess around chasing rates, paying re-mortgage fees etc longer term. You should all be 100% sure at the outset though, as it's a real shame when you see relationships soured over money - it happens a lot.

Good luck.

xylophone

If you are repaying your parents then this is not a gift but a loan.

If your parents go down this route, whether the loan is interest bearing or not, there should be a properly drawn loan agreement and the solicitor would almost certainly advise a charge against the house to secure their investment.

If interest bearing, then your parents need to look to their tax position.

rickbwfc

Thank you all. All very interesting replies.

Certainly if we were to go down this route we would have it all drawn up officially, that is a given.

I should point out that this money is coming from inheritance my Mum has received. She wants to invest it and is considering her options. This was something that I thought might work.

I already have a mortgage so it's not an issue about getting one. I want to ensure she has additional income as she is entering retirement and thought this might be a way to give her an extra income, rather than paying the bank all my interest.

Alwaylearnin - I don't fully appreciate the offset mortgage idea. Could you explain a little further?

Thanks all!

AlwaysLearnin

Offset mortgages are a product where you can link a pre-defined savings account to your mortgage, so that instead of earning interest on the savings you're saving on interest on your mortgage. So, for example, you have a £100k mortgage and offset £50k savings, you only pay interest on £50k of your mortgage, forfeiting any interest on the £50k savings.

In your case, you could look to get on offset mortgage for the £74k, then put the £74k from your parents in the related offset savings account, meaning you're paying no interest on your mortgage. You obviously get no interest on the savings either, but nor would you if you used that £74k to pay off your existing mortgage. The benefit of having in an offset account is that if you/your parents ever NEEDED the money, it would be readily available without you having to sort a mortgage out to get it (i.e. you just withdraw it from the savings and pay the mortgage as normal). Mortgage payments still need to be made, but if you make them out of the savings account, then the balance of the savings account goes down at the same rate that the mortgage reduces. I know YBS allow this if you wanted to look in to further:

http://www.ybs.co.uk/mortgages/types/offset.html

I also have a recollection that I've heard of a facility where an offset savings account could be held in the parents name, if that were preferable, but can't recall details (not necessarily YBS). This could be a way to reduce the complexities of a 'loan', as you could come to an agreement with your parents and if they deem you've broken the terms they can just draw the money out. I'm not sure you'd be able to set up the mortgage payments from that account either, so you'd need to think about mortgage payments and ensuring the savings balance isn't more than the mortgage (as doubt you'd get interest).... more thinking 'aloud' here!

You can get an offset mortgage with fairly cheap fees, especially if you're not bothered about getting a low interest rate, which you're not (as it'll be fully offset by the savings). There are sometimes cashback offers available too, reducing the cost further. Although you would have to go through this initial set up, as long as the mortgage and savings have the same balance then it can just tick along by itself, but with the benefit that you could access the money if you really needed it. You also then wouldn't have to worry yourself about discounted/fixed rate deals coming to an end etc, as it'll be irrellevant to you - you can almost forget it's there.

As said before, and by others, you'd need to make sure the agreement between you and your parents is well buttoned down though. It sounds like your mum wants a return on the money, so she needs to be totally happy with whatever the arrangements are too.

Lastly, I am not an advisor, and this is not advice. It is just meant as a response to your question, to give ideas and/or provoke thought.

Hope helps