Family Arrangement

thebman

Hi guys,

I'm new to the forum, and would like to know what you guys think of this proposal I've been considering. In my head it is win win but I have a strong feeling that I'm not considering something major, let me know what you think.

Basically, me and my partner bought our first house in Yorkshire for £180kish one year ago with a 90% LTV mortgage, so we've paid off a years worth of mortgage. We've both now entered stages in our careers where we are ready for a new challenge and have our eyes on a move to London. We really don't want to sell the house as we got a good deal and wouldn't rule out moving back up north eventually so it would be a great base in the future.

The obvious thing to do would be rent it out but I'd be worried if I declared it to our lender (only 1 year into the deal) they would up our interest rates which would make the move difficult (realistic rental income wouldn't exceed our mortgage outgoings as it is) and we would be under a lot of pressure to get the house rented out in time to move and be able to afford the extortionate rents in London.

So my idea was... my Mum recently sold her house and is happily in rented, she is looking for an investment with her pot of money, her main idea being to buy somewhere to rent out. I thought she could use her pot of money to pay off our mortgage (call it £150k) then she could take the income from renting out, which means she avoids the complexities and fees of buying somewhere, gets a regular decent income and keeps her £150k equity in the house. It also means we aren't at the bank's mercy for rate rises and dont have the pressure of being a landlord/keeping rent coming in whilst keeping down a no doubt stressful job in London and paying the capital's cost of living. But at the end of it all, we still have our house as an investment. The main uncertainty in my head is what happens if/when we want to come back, it may be that by that time we're happy to sell up but if we dont want to we could release my mum's investment back to her and take a mortgage out again to start paying off (I don't know if this is possible, keen to know!)

Would love to hear all the negatives and pitfalls from a financial or ethical stand point around this... Or if it actually sounds alright..?

Thanks!

TonyMMM

So you are going to sell you mum a % share of the house for her £150k so that she becomes a joint owner or is your idea that she gifts you the money and the house is in your name with some sort of arrangement for you to pay her an income from the rent you are going to receive ?

jacobtheamish

You would be asking a broker to commit application fraud. If the ownership is in your name, a quick land registry search will identify that and the lender will decline. If you are planning to sell the property to your mother at a knock down price, again that will raise eyebrows. Ownership of a second residential property with a mortgage will be limited by LTV and again many lenders aren't keen.
Have you actually inquired with the lender as to what consent to let would entail? Some lenders would be open to genuine reasons without charging for the privilege.
Good luck

Linton

um

thebman wrote: »

Hi guys,

I'm new to the forum, and would like to know what you guys think of this proposal I've been considering. In my head it is win win but I have a strong feeling that I'm not considering something major, let me know what you think.

Basically, me and my partner bought our first house in Yorkshire for £180kish one year ago with a 90% LTV mortgage, so we've paid off a years worth of mortgage. We've both now entered stages in our careers where we are ready for a new challenge and have our eyes on a move to London. We really don't want to sell the house as we got a good deal and wouldn't rule out moving back up north eventually so it would be a great base in the future.

The obvious thing to do would be rent it out but I'd be worried if I declared it to our lender (only 1 year into the deal) they would up our interest rates which would make the move difficult (realistic rental income wouldn't exceed our mortgage outgoings as it is) and we would be under a lot of pressure to get the house rented out in time to move and be able to afford the extortionate rents in London.

So my idea was... my Mum recently sold her house and is happily in rented, she is looking for an investment with her pot of money, her main idea being to buy somewhere to rent out. I thought she could use her pot of money to pay off our mortgage (call it £150k) then she could take the income from renting out, which means she avoids the complexities and fees of buying somewhere, gets a regular decent income and keeps her £150k equity in the house. It also means we aren't at the bank's mercy for rate rises and dont have the pressure of being a landlord/keeping rent coming in whilst keeping down a no doubt stressful job in London and paying the capital's cost of living. But at the end of it all, we still have our house as an investment. The main uncertainty in my head is what happens if/when we want to come back, it may be that by that time we're happy to sell up but if we dont want to we could release my mum's investment back to her and take a mortgage out again to start paying off (I don't know if this is possible, keen to know!)

Would love to hear all the negatives and pitfalls from a financial or ethical stand point around this... Or if it actually sounds alright..?

Thanks!

Lets say remove confusion by saying what you are actually proposing.

1) Mum gives you £150K
2) You pay off your mortgage.
3) You start getting rental income on which you will be paying income tax
4) You pass the reduced rent to Mum
5) At some stage in the future you may sell the house and give Mum her £150K back or is it £150K + capital growth?

What happens if you die or go bankrupt before stage (5)? The house is part of your estate, Mum has no rights.
What happens if Mum needs her money early, eg to pay for care, or take a round the world trip?
What happens if your house is empty for a while. Does Mum lose her income?

Playing games with property ownership is a seriously bad ideas.

antrobus

jacobtheamish wrote: »

You would be asking a broker to commit application fraud. If the ownership is in your name, a quick land registry search will identify that and the lender will decline. If you are planning to sell the property to your mother at a knock down price, again that will raise eyebrows. Ownership of a second residential property with a mortgage will be limited by LTV and again many lenders aren't keen.
Have you actually inquired with the lender as to what consent to let would entail? Some lenders would be open to genuine reasons without charging for the privilege.
Good luck

I am not convinced you have quite got the gist of Plan A; Mum is going to use her pot of money to pay off the mortgage, and then take the income from renting out the property, whilst the OP and partner are off enjoying life in the smoke. No mortage, no broker, no lender, no problem.

thebman wrote: »

....Would love to hear all the negatives and pitfalls from a financial or ethical stand point around this... Or if it actually sounds alright..?

Off the top of me 'ead.

Your mother would have to own the house; otherwise the rental income would be taxed as if it was yours.

If that was the case you might want to sell the house to your mother at market value, irrespective of the fact that she is only paying enough to clear the mortgage i.e. lend her what is effectively your equity in the property and document it as a loan.

Have you thought about what would happen if your mother died and whether there would be any inheritance tax to pay?

Have you thought about what would happen if your mother became ill and was admitted to a nursing home and how the fees would be paid?

antrobus

And one more thing.

If mother owned the house and it was rented out, and you then decided you'd had enough of London, and wanted to move back up north and retrieve the house, then mother might well have to pay capital gains tax on any increase in the value of the house in the meantime.

samba

thebman wrote: »

But at the end of it all, we still have our house as an investment.

Except you don't because it's your mum's house now isn't it? For God's sake, never do business with friends and family, it will just end in tears.

thebman

Thanks for all the comments guys, some fair points, and tbh I think the whole situation would just feel weird and I don't think I'd want to use my Mum like that and restrict her options. Agree that when in doubt it's best not to get family involved in these situations. Also my partner wasn't too keen!

Keep an eye out for a follow up thread containing all the questions I've got about renting the house out the conventional way, I've got a lot to learn!

B Man