Borrowing from Parents????

FatDickie

We have reached a point with our Nationwide mortgage, where we are at the end of a 2 year tracker deal and need to renegotiate. Due to some inheritance we will be able to reduce our mortgage down to £26,000 over an 8 year term with low payments allowing us to make overpayments to drasticly reduce the term.

They have offered us a 2 year no fee tracker @ 6.08% and we have also found a C&G no fee lifetime tracker with 5.92% interest.

Now the dilema..

Having spoken to a parent (non working pensioner - non tax payer) they have offered to lend us the £26k, instead of us having to borrow from a building society.

We can then pay them back as an when we wish and as much as we can afford each month...

We have yet to work out the nominal interest that the parent would require etc...

But...

Would the tax man become interested?

Would the monthly payments that we make to the parent be classed as Income?

JonnyBravo

The taxman would become interested if your parent died.... inheritance tax would be due on the estate and that £26k would be part of the estate

No the monthly payments wouldnt be counted as income, but I guess any profit made from interest charged may be. I'd guess that would be minimal on a "preferential rate" from parents and on only £26k not much to worry about

firesidemaid

can your parents do without the interest on the money?

if not, your payments may well be the same - as they can get 6%+ on their money in a savings vehicle (maybe minus the tax).

if they can, then pay it off asap so that you owe nothing to no-one!

FatDickie

Thanks for that. The parent doesn't really want the interest and just wishes to help us out, but we feel that we need to give them something so were thinking along the lines of 4%.

MoneySavingNovice

You are very lucky to have such kind parents.

My suggestion would be to accept the offer of the interest free loan, but give your parents a 'gift' every year of say £1,040 i.e. equal to your 4% rate but as its a gift is exempt from all tax and thus should solve your problem.

FatDickie

Cheers for that JonnyBravo. :beer:

Settled on 4% (or there abouts) and a 26k loan. they do not want it repaid in stages, just the whole 26k when we are ready...

I will then invest my usual monthly mortgage repayment (plus as much overpayment as i can) into the highest regular savings product I can find and when we reach 26k, we pay them back the full amount.

We have some cash in ISA's which will help to reach our goal quicker and at a rough estimate we will be mortgage free in three years :j

The beauty is that the hardy we make the money work for us, the quicker we can be mortgage free.

bunking_off

For me, this is a very sensible way of running finances (so long as there are no family bust ups), and one that I'm mystified that more people don't do. Why would parents have money in the bank earning a lower interest rate than their offspring are paying out for their mortgage? Why not pool?

My in-laws had some money they were looking to put into a savings account, so instead we agreed that they'd put it into our flexible mortgage. We call it "the bank of Bunking_Off", and I provide them with statements of their investment every few months. For me, it's not them lending money to help us out, it's about minimising the banks' profits...they make money on lending at a far higher interest rate than they provide on savings.

As it happens, we pay the in-laws interest at our mortgage rate, so we don't benefit from the deal. However, it's possible to pay interest at half way between the prevailing savings and mortgage interest rates, so both parties benefit...the parents get more money than they would have done in savings accounts, children pay less interest on their mortgage...real win-win situation.