Buying living parents house with Buy-To-Let mortgage

dack_2

Hi.

I am in need of some advice and will try and keep this short and to the point (some hope!).

My parents are elderly (69 & 70yrs old). My father built his current house and has an interest only mortgage on it which expires in about 3 months. The house was recently valued at £250k (once the drive is completed, the only work remaining) and I believe the outstanding mortgage is £115k. He also has approximately £20k of credit card debt accrued finishing the house.
His intention has always been to finish the house and sell it moving into somewhere smaller.

Things got turned upside down a few months ago when my mother became life-threateningly ill with a twisted bowel and since being operated on is now suffering with dementia, probably Alzheimer's. This is obviously devastating for the family and in practical terms has prevented my father from finishing the house and selling it before the bank repossess it. He has asked the mortgage lender for extra time but they refused.

My wife and I want to help out, and the only way I can see us being able to do so is by buying the house using an interest only buy-to-let mortgage and renting it back at an affordable (below market rate) amount. My father asked me if we could do this and said he would gift us the equity in the house as a deposit and pay rent he could afford. His only concern is that the value of the house stays in the family and doesn't get lost to the bank through repossession. All my wife, my siblings and I want is for them to not be stressed by these issues, and have the option of staying in the house for the rest of their lives or moving to somewhere smaller in the future if they wish, and in their own time.

With the above in mind, these are my thoughts:

Get gifted the equity in the house (approx £135k).

Purchase the house with a Buy-To-Let mortgage.

Get paid a relatively small amount of rent but hopefully enough to cover the interest payments. We can pay a little extra but cannot commit to a huge amount due to my wife being ill and some uncertainty about her ability to work in the long term.

In a year or two start saving as much as possible in highest interest accounts/ISA's. This could be used to pay off the mortgage in the future or simply be a nest-egg if we decide at some point to sell the house. If and when we sell my father trusts me to do right by my two brothers and sister. Essentially any 'profit' from the deal would be shared.


This all raises several questions that I'm hoping you guys and girls can answer.

What are the implications of the gifted equity regarding inheritance taxes and such? The gift would initially be to myself (and wife) but if we outlive my parents and sell the house I would share any profit with my siblings.

I am an ex-bankrupt, discharged almost 5 years ago, with a regular job. My wife also works. Apart from some overdue post-bankruptcy credit file clean-up issues my credit since the bankruptcy has been flawless and I have regularly used credit cards to rebuild my ratings (cleared each month). I know the bankruptcy makes getting a mortgage harder but from what I've read we do have a chance. I also understand that gift deposits for mortgages carry less weight than regular savings. We currently have no savings as it's taken a long time to recover from the bankruptcy, which included buying back the OR's interest in our family home, and more recently have had major house repairs done. We now own our home outright, mortgage free, though it's a low value property at between £45 and £55k (my estimate).

I understand that we could offset income tax from the rental income against the amount of interest paid each month. Are there any other implications I should be aware of?

If we could get the mortgage, we were thinking of applying for £135k which would cover the outstanding mortgage balance and my father's credit card debts and leave a little so he can get the drive finished. Would this be wise or should the credit card debts be dealt with in another way?

If after getting the mortgage things went drastically wrong and we needed to sell the house we could at least do it on our own timeline and not the banks and I believe the equity in the house would make it an almost certain bet that we wouldn't lose out financially. Your thoughts?

Finally, if we fail to get a mortgage, I would like to know if the bank can just repossess the house and leave my parents homeless without applying to the courts. And if it went to court would my mother's health have a significant bearing on the Judge's decision? If they were allowed to stay they could continue paying the interest payments, at least unless rates rise sharply in the near future. They won't however have much hope of clearing the credit card debts.

My mother and father are wonderful, loving, caring and honest people. It hurts like hell to see them going through this, and it's making my father sick with worry. I need to help in any way I can, please help me find a way to do this.

Thank you.

Cornucopia

I'm pretty sure that the Banks won't lend on a BTL basis if the tenants are relatives of the borrower.

Have you/your father tried approaching the original bank and asking for an extension to the mortgage, say for a year, so that the property can be finished and sold?

I had a property (on BTL) which due to an error by the Bank expired with Interest-only capital unpaid. All that happened was that they asked for the capital, and kept the mortgage running in the meantime. Obviously, this is no guarantee of what might happen in your case.

Hope it works out for you & your family.

DTDfanBoy

If your father only has equity in his house you won't be able to get a mortgage based on your father gifting you that equity, someone is going to have to find some cash to get the ball rolling.

dack_2

Thanks for the responses.

Cornucopia:

I have been able to find a couple of lenders that offer FCA regulated BTL mortgages for renting out to relatives but, as you say, I found that most do not.
I too think it's unlikely that the bank would repossess straight away but it's the worry and stress of not knowing that I wish to try and mitigate. I haven't spoken to my dad's mortgage lender myself but he has and got turned away. He also had an estate agent/financial advisor offer to talk to them, which he did, and I think he said they would give him 3 months which ends in June or July. Either way it's not enough time to sort things out and sell the property for a reasonable price.

DTDfanBoy:

It seems you are right regarding the deposit, every FCA regulated BTL I've read about so far will not allow borrowed or gifted deposits.

If you or anyone else can shed any more light on these or other aspects of the post that would be great. I'm also interested in any other ideas people have for sorting this out, I've racked my brain over this but there must be something I am missing.

Thanks

Cornucopia

Okay, in no particular order, and slightly clutching at straws...

- Look at remortgaging your parent's property with their existing lender or a new one. Many lenders now lend up to age 75.

- Look at "fast sale" companies - they offer less than market price, but that may still be better & less stressful than repossession.

- Equity release products? These are specifically marketed at older people, so no issues with qualifying age.

- Since you are mortgage-free, could you take a residential mortgage on your parents' property?

- See if you can negotiate with the existing lender for an orderly repossession, rather than seeing it out to the bitter end.

I think you would find it useful to speak with a good Mortgage Broker or possibly a specialist Solicitor. Unfortunately, the details of tax liability will probably have to wait until you've found out what the viable options are.

Pixie5740

This all seems unnecessarily complicated and could have some serious implications if you're able to find any lender willing to go along with this. Doing this your father would be deliberately depriving himself of assets and if you end up owning the property there could be capital gains tax if/when you sell as well as all the other landlord responsibilities you would have. As the equity is a gift with reservation it would be counted towards any inheritance that might be due when your parents have passed away.

Is your father unable to meet the current mortgage repayments? If so could you not just give him some money each month to top-up his repayments. If you go ahead with your plan and charge him less rent than the mortgage repayments this is essentially what you'd be doing anyway but in a much more complicated and less tax efficient way.

Annisele

dack wrote: »

Finally, if we fail to get a mortgage, I would like to know if the bank can just repossess the house and leave my parents homeless without applying to the courts. And if it went to court would my mother's health have a significant bearing on the Judge's decision?

No, the bank can't repossess without a court order.

I'd be astonished if the existing lender wouldn't agree a short extension on the mortgage term to enable your parents to sell. I know they don't want to sell, but that should take the immediate pressure off.

I know you've said the lender only agreed three months, but it's possible it meant "three months to start with - and if you can show you've used those three months to do something productive towards paying off the debt, you can have three more".

I think your plan of getting a mortgage in your own name secured against your parents' house is an absolute non-starter. You've got the regulated BTL issue, the gifted deposit issue, the fact it would be a "sale-and-rent-back" (which lender's really don't like) - and I think that kills the plan long before we get to your credit issues.

If your parents were planning on selling the house anyway, and they'd get £250k with the drive done, can't they just sell for a bit less without doing the drive? Not having a drive shouldn't make the place unmortgageable.

AdrianC

Your best bet may be to mortgage your own home, lend your father the money to get his house to a saleable condition, allowing them to sell it - then use the remaining equity to jointly purchase a house between your parents and yourselves. Your mother's care needs are only going to increase, so your father may need extra support from you in the near future. There's a very high chance of her needing expensive residential care in the future, so deprivation of assets investigations are very likely, especially given the timescales here.

dack_2

Hi all,

Thank you very much for your responses, they have been very useful in setting some realistic expectations and allowing me to focus on the options that have more of a chance to work.

antenna

Do your parents currently have £135,000 available to pay off the capital sum and their credit card debt?,nowhere do i read that they have this money......if he has, then the bank wont repossess it. if he hasn't then he is leaving this a bit late....seems to me that there is more to this than meets the eye,be very carefull how they dispose of assets to maybe get assisted care home costs paid.

Cornucopia

Surely there must be some exemption or concession on deprivation of assets for a situation like this where the sale might be forced?