Buying flat for daughter with mortgage?

Dr_Wu

Hi


We're in the fortunate position that we'll both be retired by the end of this year. We'll have a good pension, mortgage has been cleared for about 4 years now and we reckon we will have at least £500pm 'spare' cash that we would otherwise be investing/saving somewhere (we really have looked at this carefully and made sure that we are still going to be left with a good chunk of savings and monthly income to fund holidays/unexpected expenses etc)


Our youngest daughter (21) will be moving out in the next year or so probably to live with her partner in a flat locally. They were going to rent as they would not be able to afford a mortgage/deposit.


We were thinking about buying the flat for them as an investment for ourselves (i.e. a property as well as savings) maybe at a cost of around 100K and putting down 20K as a deposit. We would obviously just charge them rent at a cost to cover the mortgage or maybe even at a 'discounted rate' to help them get on their feet


I was just wondering what advice the good folks here might have regarding such a proposal, any pitfalls? anything to watch out for?


Is it straightforward enough to get another mortgage? (assume we're 55 and 56 and both retired, joint income will be around 36K gross, existing house paid for, value around 250K)


Would this have to be what's called a 'buy to let' mortgage? and are there any special conditions attached to this? (higher interest rates etc?)


Any advice/suggestions would be really welcome as this is all a bit new to us.


Thanks in advance

Pixie5740

As you are letting to family you will require a regulated buy-to-let mortgage. You will also have to pay an additional 3% SDLT when you purchase the property and the rental income will be subject to income tax.

Will this be much of an investment if your net yield will be 0% or even negative? You need to decide what the real goal is, to help your daughter or to have an investment.

G_M

Yes you'd need a BTL mortgage as you'd be landlords, and as pixie says, most BTL mortgages prohibit letting to family - speak to an independant mortgage broker.

2nd property SDLT
Tax on rent
Capital Gains Tax when you sell

And see:

* New landlords: advice, information & links

saajan_12

Few issues / considerations

Lenders often don't like lending much past retirement age, so at age 55/56, I reckon you'd only get a mortgage with upto a 15year term. This will narrow your pool of lenders on a repayment mortgage, your monthly payments are higher with a shorter term.

If you get a mortgage on the new property:
1) It would need to be a regulated BTL as you will be letting to a 'connected person'. You are less likely to evict if there are any issues with family and it's not completely a business relationship.

2) A BTL typically has a max LTV of 75% so you would need the remaining 25% as a deposit, plus legal/survey/mortgage costs etc all from savings.

3) A BTL is typically interest only, so at the end of the term you still need to pay off the full loan, from savings or by selling (may need to evict any tenants e.g. daughter)

Alternatively, remortgage your current property and buy flat outright
1) Your own home would be at risk, which is a massive consideration

2) You may be able to get a residential mortgage if you pass affordability checks on your income (some lenders don't count rental income).

3) If your house is worth more than the flat, then borrowing the same money would mean a lower LTV, which may give you lower interest rates.

4) You may need to disclose what you will use the funds for, but the letting to family may be less of a complication.

Ozzuk

Property is 'usually' a good long term investment but not so much in the scenario you are outlining.

To make this attractive to your daughter you'll need to make the rent cheap, which impacts your return. Or you make it market rate in which case where is the incentive for her and what happens if she wants to move? You could be then stuck selling early, quite likely at a loss given your upfront costs/tax position, or renting to strangers (which isn't the end of the world, but comes with its own potential issues).

I think you need to give this a lot more thought, and also look at other options for a better return - SIPP payments for example.

Mossfarr

An alternative solution is to purchase the property as a joint owner with your daughter. You won't need a BTL mortgage, you can get a residential mortgage (my bank told me you can have up to four residential mortgages).
I purchased a 'starter house' jointly with my daughter seven years ago, I paid 50% of the value as deposit and furnishing/refurb costs and my daughter lives in it and pays the mortgage for the other 50% of the value. The long term plan is that we split the proceeds 50/50 when its sold. We had no problems getting a mortgage. They will only lend up to the age of 70 so the mortgage term will be over 14 years if you are 56 years old. You also have to demonstrate that you can afford the repayments (if you apply for a mortgage through your bank its quicker and easier as they already have all the information about your income and how you manage your finances).
As a joint owner your daughter will not be paying rent so you don't have to worry about all the issues about becoming a landlord.
Its not without complication though, your daughter has a partner (my daughter was single) so you would need to consider the partners position as they will presumably be contributing to their household income. What would happen if they split up and they claim a share of the property?
As you already own your own home you will have to pay the extra 3% stamp duty and you need to check the capital gains/inheritence tax implications.

booksurr

saajan_12 wrote: »

2) You may be able to get a residential mortgage if you pass affordability checks on your income (some lenders don't count rental income).

a regulated BTL mortgage is based on affordability criteria so would be the same as the "residential" mortgage you are thinking of

in theory it should be a cheaper interest rate if the OP to takes out a mortgage against their own home and uses that money to buy one for the daughter for "cash"

OP - as others have said, be clear on whether this is an investment or a helping hand for the daughter because what you have said so far is a totally mixed agenda. Zero or negative revenue is not the basis of an investment .

Cakeguts

Just have a bit of a think about this. You rent a flat to your daughter and her partner and then they split up. You daughter leaves the flat and then her ex partner is living in your flat. If they can't afford the rent on their own what are you going to do? What would you do if they decided not to pay the rent?

If your daughter gets made redundant and she can't afford to pay the rent she may not get housing benefit so then what do you do, evict her?

These sorts of problems are why it is an extremely bad idea to rent to family or friends. You could end up falling out with each other.

Your daughter is only 21 she may not stay in the area for long. The point about renting is that you can move very easily so if they get jobs in a different area they can move really easily. You will make it awkward for them if they have to tell you that they have decided to move to a different area of the country and are giving you notice that they are moving out of your flat.

Dr_Wu

I am staggered by the quantity and quality of the really helpful replies here. They have all raised highly relevant issues which I hadn't really considered.


Much thinking to be done!


Thanks again.

martindow

Do you have other children? If so you really need to think about whether the others could receive similarly generous help.

Kind gestures to one child can result in ill-feelings in the rest of the family.

Crashy_Time

http://www.independent.ie/business/personal-finance/property-mortgages/significant-blow-for-mortgage-holders-low-tracker-rates-to-rise-35478118.html